Viryanet (VRYAF) 20-F 2013 FY Annual report (foreign)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                    

For the transition period from                    to                    

Commission File Number 000-31513

VIRYANET LTD.

(Exact name of Registrant as specified in its charter)

Israel

(Jurisdiction of incorporation or organization)

8 HaMarpe St.

Har Hotzvim

P.O. Box 45041

Jerusalem 91450

Israel

(Address of principal executive offices)

Memy Ish-Shalom

8 Ha Marpe St.

Har Hotzvim

P.O. Box 45041

Jerusalem 91450

Israel

Telephone +972-2-584-1000

Facsimile: +972-2-581-5507

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act: None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Ordinary Shares, par value NIS 5.0 per share

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

As of December 31, 2013, the Registrant had 4,105,927 shares outstanding, comprised of 3,779,130 Ordinary Shares and 326,797 Preferred A Shares.

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    ¨  Yes    x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer  ¨                  Accelerated filer  ¨                 Non-accelerated filer  x

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

x  U.S. GAAP ¨  International Financial Reporting Standards as issued by the International Accounting Standards Board ¨  Other

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

TABLE OF CONTENTS

ITEM		Page No.
	PART I		2
Item 1.	Identity of Directors, Senior Management and Advisers		2
Item 2.	Offer Statistics and Expected Timetable		2
Item 3.	Key Information		2
	Selected Financial Data		2
	Capitalization and Indebtedness		4
	Reasons for the Offer and Use of Proceeds		4
	Risk Factors		4
Item 4.	Information on the Company		16
	History and Development of the Company		16
	Business Overview		18
	Organizational Structure		23
	Property, Plants and Equipment		23
Item 4A.	Unresolved Staff Comments		23
Item 5.	Operating and Financial Review and Prospects		23
	Overview		23
	Operating Results		23
	Liquidity and Capital Resources		36
	Research and Development, Patents and Licenses, etc.		40
	Trend Information		40
	Off-balance Sheet Arrangements		41
	Tabular Disclosure of Contractual Obligations		42
Item 6.	Directors, Senior Management and Employees		42
	Directors and Senior Management		42
	Compensation		44
	Board Practices		45
	Employees		50
	Share Ownership		50
Item 7.	Major Shareholders and Related Party Transactions		51
	Major Shareholders		51
	Related Party Transactions		54
	Interests of Experts and Counsel		55
Item 8.	Financial Information		56
	Consolidated Statements and Other Financial Information		56
	Significant Changes		56
Item 9.	The Offer and Listing		57
	Market Price Information		57
	Markets on Which our Ordinary Shares Trade		57
Item 10.	Additional Information		57
	Share Capital		57
	Memorandum and Articles of Association		57
	Material Contracts		62

ITEM		Page No.
	Exchange Controls		62
	Taxation		62
	Documents on Display		71
Item 11.	Quantitative and Qualitative Disclosures About Market Risk		71
Item 12.	Description of Securities Other than Equity Securities		72
	PART II		72
Item 13.	Defaults, Dividend Arrearages and Delinquencies		72
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds		72
Item 15.	Controls and Procedures		72
Item 16.	Reserved		73
Item 16A.	Audit Committee Financial Expert		73
Item 16B.	Code of Ethics		73
Item 16C.	Principal Accountant Fees and Services		74
Item 16D.	Exemptions from the Listing Standards for Audit Committees		74
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers		74
Item 16F.	Change in Registrant’s Certifying Accountant		74
Item 16G.	Corporate Governance		74
Item 16H.	Mine Safety Disclosure		74
	PART III		74
Item 17.	Financial Statements		74
Item 18.	Financial Statements		75
Item 19.	Exhibits		76

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain information included or incorporated by reference in this annual report on Form 20-F may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are often characterized by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue,” “believe,” “should,” “intend,” “project” or other similar words, but are not the only way these statements are identified.

These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that contain projections of results of operations or of financial condition and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future.

Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-looking statements on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things:

• timely development and degree of acceptance for our new products;

• competitive pricing;

• general market, political and economic conditions in the countries in which we operate;

• projected capital expenditures and liquidity;

• changes in our strategy;

• government regulations and approvals;

• changes in customers’ budgeting priorities;

• litigation and regulatory proceedings; and

• those factors referred to in Item 3 “Key Information - Risk Factors”, Item 4 “Information on the Company”, and Item 5 “Operating and Financial Review and Prospects”, as well as in this annual report generally.

Except to the extent required by law, neither we, nor any of our respective agents, employees or advisors, intends or has any duty or obligation to supplement, amend, update or revise any of the forward-looking statements contained or incorporated by reference in this annual report.

CERTAIN TERMS AND CONVENTIONS

In this annual report, unless the context otherwise requires:

• references to “ViryaNet,” “our company,” “the Company,” “the registrant,” “we,” “us,” and “our” refer to ViryaNet Ltd. and its consolidated subsidiaries;

• references to “Ordinary Shares”, “our shares” and similar expressions refer to the Company’s Ordinary Shares, par value NIS 5.0 per share;

• references to “dollars”, “U.S. dollars”, “U.S. $” and “$” are to United States Dollars;

• references to “Euro” or “€” are to the Euro, the official currency of the Eurozone in the European Union

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• references to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency;

• references to the “articles” are to our Articles of Association, as amended;

• references to the “Companies Law” are to Israel’s Companies Law, 5759-1999, as amended;

• references to the “Securities Act” are to the Securities Act of 1933, as amended;

• references to the “Exchange Act” are to the Securities Exchange Act of 1934, as amended;

• references to “NASDAQ” are to the Nasdaq Stock Market; and

• references to the “SEC” are to the United States Securities and Exchange Commission.

PART I

Item 1. Identity Of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

Selected Financial Data

The tables that follow present portions of our financial statements and are not complete. You should read the following selected financial data together with our consolidated financial statements included elsewhere in this annual report, the notes thereto and “Item 5. Operating and Financial Review and Prospects” of this annual report. Historical results are not necessarily indicative of any results to be expected in any future period.

We have derived the selected consolidated statements of operations data below for the years ended December 31, 2013, 2012 and 2011, and the selected consolidated balance sheet data as of December 31, 2013 and 2012, from our audited consolidated financial statements that are included elsewhere in this annual report. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. We derived the consolidated statements of operations data for the years ended December 31, 2010 and 2009 and the selected consolidated balance sheet data as of December 31, 2011, 2010 and 2009 from audited consolidated financial statements that are not included in this annual report.

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Summary Consolidated Financial Information

U.S. dollars in thousands (except share and per share data)

	Year ended December 31,
	2013			2012			2011			2010			2009
Statement of Operations Data(1):
Revenues:
Software licenses	$	1,679		$	1,154		$	1,549		$	1,574		$	1,453
Maintenance and services		9,935			9,559			8,122			8,735			8,298
Total revenues		11,614			10,713			9,671			10,309			9,751
Cost of revenues:
Software licenses		79			122			56			68			62
Maintenance and services		3,879			4,101			3,513			3,873			3,591
Total cost of revenues		3,958			4,223			3,569			3,941			3,653
Gross profit		7,656			6,490			6,102			6,368			6,098
Operating expenses:
Research and development, net		1,586			1,100			1,614			1,010			1,029
Sales and marketing		2,747			2,650			2,847			2,782			2,546
General and administrative		1,729			1,606			1,708			1,551			1,648
Total operating expenses		6,062			5,356			6,169			5,343			5,223
Income (loss) from continuing operations		1594			1,134			(67	)		1,025			875
Other income (expense):
Financial expenses, net		(289	)		(196	)		(129	)		(237	)		(155	)
Gain on forgiveness of debt		210			—			—			—			—
Total other expense, net		(79	)		(196	)		(129	)		(237	)		(155	)
Income (loss) from continuing operations before taxes on income		1,515			938			(196	)		788			720
Taxes on income		32			27			9			69			47
Net income (loss) from continuing operations	$	1,483			911			(205	)		719			673
Income (loss) from discontinued operations		—			—			(14	)		(50	)		(177	)
Net income (loss)	$	1,483		$	911		$	(219	)	$	669		$	496
Basic net income (loss) per share	$	0.36		$	0.23		$	(0.06	)	$	0.19		$	0.16
Weighted average number of shares used in computing basic net income (loss) per Ordinary Share		4,064,298			3,896,018			3,671,547			3,467,302			3,176,831
Diluted net income (loss) per share	$	0.33		$	0.21		$	(0.06	)	$	0.17		$	0.14
Weighted average number of shares used in computing basic and diluted net loss per Ordinary Share		4,460,435			4,279,961			3,671,547			3,884,201			3,540,467
	As of December 31,
	2013			2012			2011			2010			2009
Balance Sheet Data:
Cash and cash equivalents	$	921		$	335		$	104		$	97		$	156
Working capital (deficit)		(2,736	)		(4,318	)		(4,528	)		(5,635	)		(5,611	)
Total assets		10,735			9,190			9,211			9,760			9,241
Long-term bank loans, including current maturities		652			1,143			1,499			1,089			1,289
Long-term convertible debt		—			—			502			—			530
Shareholders’ equity (deficit)		2,941			1,302			270			357			(606	)

(1) We have reclassified our historical results of operations in 2009 and 2010 to remove the operations of two entities of which we disposed during 2011— ViryaNet Pty in Australia and ViryaNet Europe in the U.K.— from our revenues and expenses, collapsing the net income or loss from these operations into a single line within discontinued operations. All of the operations data in this annual report, including data that appears in Item 3 “Key Information - Risk Factors”, and Item 5 “Operating and Financial Review and Prospects”, reflects this reclassification.

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Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.

Risk Factors

You should carefully consider the risks described below and in the documents we have incorporated by reference in this annual report before making an investment decision. The risks described below and in the documents we have incorporated by reference in this annual report are not the only ones facing our company. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our Ordinary Shares could decline due to any of these risks, and you may lose all or part of your investment. As described elsewhere herein, we have entered into a share purchase agreement under which we have agreed to be acquired byVerisae, Inc. The risks related to this transaction (and our potential failure to consummate the transaction) are described in the proxy statement for the extraordinary general meeting of shareholders at which the transaction will be subject to approval by our shareholders, which is attached to our Report of Foreign Private Issuer on Form 6-K, which we furnished to the SEC on July 1, 2014. We urge you to review the “Risk Factors” described therein, which are incorporated by reference in this “Risk Factors” section of Item 3 of this annual report.

Risks Related to our Business and Financing Needs

We incurred net losses since the founding of the Company through 2008 and in 2011 and have a significant accumulated deficit and may incur losses again in the future.

Although we had net income of $1.5 million in 2013, $0.9 million in 2012, $0.7 million in 2010 and $0.5 million in 2009, we had incurred a substantial net losses prior to 2009 and again incurred a net loss in 2011, and may not maintain our profitability in 2014 or in future years. As of December 31, 2013, we had an accumulated deficit of approximately $118.3 million. In order to achieve and maintain profitability we will need to increase our revenues while containing or reducing our costs. However, a substantial portion of our expenses, including most product development and selling and marketing expenses, must be incurred in advance of when revenue is generated. Therefore, if our projected revenue does not meet our expectations, we are likely to experience an even larger shortfall in our operating profit relative to our expectations. While our revenues in 2008 were $10.6 million, we incurred net losses of $2.1 million during that year. While we achieved profitability in 2009 and 2010, our revenues in those years decreased to $9.8 million and $10.3 million, respectively, compared to 2008. Furthermore, our revenues in 2011 further decreased to $9.7 million compared to 2010, and we incurred a loss of $0.2 million, after two consecutive profitable years. We cannot assure you that we can continue the increase in our revenues that we experienced in 2012 and 2013, or, even if we are able to increase our revenues, that we will be able to maintain our profitability on a consistent basis.

Our operating results have fluctuated significantly in the past and may fluctuate significantly in the future, thereby making it difficult for investors to make reliable period-to-period comparisons of such results, which may contribute to volatility in the market price for our Ordinary Shares and may adversely impact the price of our Ordinary Shares.

Our revenues, gross profits and results of operations have fluctuated significantly in the past and we expect them to continue to fluctuate significantly in the future. The following events or factors may cause fluctuations in our operating results and/or cause our share price to decline:

• changes in global economic conditions in general, and conditions in our industry and target markets in particular;

• changes in demand or timing of orders, especially large orders, for our products and services;

• the length and unpredictability of our sales cycle;

• timing of product releases;

• the dollar value of, and the timing of, our contracts;

• delays in completion of implementation projects with customers;

• the mix of revenue generated by software licenses and professional services;

• price and product competition;

• changes in selling and marketing expenses, as well as other operating expenses;

• technological changes;

• our ability to expand our workforce with qualified personnel, as may be needed;

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• reductions in the level of our cash balances and our ability to raise cash;

• consolidation of our customers;

• fluctuations in the economic factors impacting the Israeli prime interest rate (which is the benchmark rates used to determine the interest expenses incurred by us on our bank borrowings under our bank arrangements);

• the geographic composition of our revenues;

• integration and assimilation of management, employees and product lines of acquired companies;

• effectiveness of our customer support, whether provided by our resellers or directly by us; and

• foreign currency exchange rate fluctuations, primarily the US dollar against the Israeli shekel.

As a result, we believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful and that you should not rely on them as indicative of our future performance. Also, it is possible that our results of operations may be below the expectations of public market analysts and investors. If this happens, the price of our Ordinary Shares is likely to decrease.

We may not be able to meet or refinance our debt payment obligations in the future.

Our ability to meet our payment obligations under our debt liabilities, will depend on whether we can successfully implement our strategy, as well as on financial, competitive, and other factors, including some factors that are beyond our control. If we are unable to generate sufficient cash from operations to meet principal and interest payments on our debt or to repay our debt obligations in full at their maturity dates, we may have to refinance all or part of our indebtedness. Our ability to refinance our indebtedness, will depend upon, among other things: our financial condition at the time; restrictions in agreements governing our debt; and, other factors, including market conditions.

We cannot ensure you that any such refinancing would be possible on terms that we could accept, or that we could obtain additional financing at all. If refinancing will not be possible or if additional financing will not be available, that would have a material adverse effect on our business.

We may need additional financing and may not be able to raise additional financing on favorable terms or at all.

During each of the six years in the period ended December 31, 2013, we had positive cash flow from operations. However, prior to 2008, we had negative cash flow from operations for each of the several preceding years. Over the past five years, we have raised only approximately $0.1 million in equity financings. However, we expect that we may need additional financing to fund our business operations. Any additional financing that is structured as a secured debt financing may require the consent of our main current creditors, Bank Hapoalim and Bank Otsar Ha-Hayal. Our ability to raise additional financing from third parties may be impacted by the limited liquidity of our Ordinary Shares in the OTCQB marketplace of OTC Markets Group. We cannot assure you that additional financing will be available on terms favorable to us, or at all. In the event that the market price of our Ordinary Shares does not appreciate, or if it declines, we may not be able to consummate a private equity financing transaction to raise additional capital. If adequate funds are not available or are not available on acceptable terms, our ability to fund our day to day operations, expand our research and development, and marketing and sales, efforts, pursue potential acquisitions, take advantage of unanticipated opportunities, develop or enhance our website content, features, services, or otherwise respond to competitive pressures would be severely constrained. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing shareholders will be reduced, and any newly issued securities may have rights, preferences or privileges senior to those of existing shareholders.

We will need sufficient funds to re-pay our loans from Bank Otsar Ha-Hayal and our potential draws on our line of credit from Mercantile Discount Bank, all of which may be subject to immediate repayment if we do not meet our repayment schedule or meet specified conditions.

We have received an aggregate of NIS 3.1 million (approximately $0.89 million, based on the dollar-shekel exchange rate reported by the Bank of Israel as of December 31, 2013) of bank financing that is guaranteed by the Israeli government based on an approval from Israel’s State Guaranteed Medium Business Assistance Fund, or the Fund, and with respect to which Samuel HaCohen, the Company’s Chairman of the board of directors, has provided a personal guarantee. The financing was provided to us in four increments (NIS 750,000 in July 2011, NIS 1,350,000 in September 2011, NIS 500,000 in October 2012 and NIS 500,000 in January 2013) by the Fund’s participating bank, Bank Otsar Ha-Hayal. The loans bear interest annually at the Israeli prime rate, plus 3.5%, which is payable on a monthly basis, beginning one month following the receipt of the loans. The principal portions of the NIS 750,000 and the NIS 1,350,000 loans are payable in 49 equal monthly payments of NIS 18,080 and NIS 32,545, respectively (each of which includes interest as well), beginning on August 6, 2012 and September 8, 2012, respectively. The principal portions of each of the NIS 500,000 loans are payable in 60 equal monthly payments of NIS 9,960 and 9,842, respectively (each of which includes interest as well), beginning one month following the receipt of the loans. We are in the process of closing a line of credit of

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approximately NIS 2.6 million with Mercantile Discount Bank to replace our credit lines with Bank Hapoalim and Bank Leumi. We expect that the credit line will be apportioned as follows, subject to the delivery of final, signed documentation: NIS 1.3 million will serve as revolving credit lines, in the aggregate, consisting of 1.1 million denominated in U.S. dollars and NIS 0.2 million denominated in shekels; NIS 1 million will serve as an additional credit against our invoices; and NIS 0.3 million will serve as a guarantee to our Israeli landlord. The overall line of credit will be secured by (i) a personal guarantee of Samuel HaCohen, our Chairman of the Board of Directors, and a guarantee of Jerusalem Hitech Founders Ltd,; (ii) a restricted deposit of NIS 1.0 million; and (iii) a floating charge on all of our assets, which will replace the existing floating charge in favor of Bank Hapoalim. Our bank covenants, as part of our overall financing arrangement, require that on an annual basis our shareholders’ equity shall be at least the greater of (a) 20% of our total assets, or (b) $2.2 million. In addition, we have agreed to pay Mercantile Discount Bank a fee equal to 150,000 times the amount by which our closing share price exceeds $3.30 per share as of any day within the ten trading days preceding a day chosen by the bank within three years following June 12, 2014, subject to a $150,000 maximum fee. The bank’s right to payment of this fee terminates upon the occurrence of a merger involving, or an acquisition of, our company. For more information, please see “Item 5. Operating and Financial Review and Prospects— Liquidity and Capital Resources—Sources of Cash—Bank Financing”

We may need to obtain funding from third parties to meet the payment obligations under the above-described loan arrangements in a timely manner, and there is no assurance that Bank Otsar Ha-Hayal or Mercantile Discount Bank will grant us an extension of these payment dates (in the case of Mercantile Discount Bank, to the extent that we draw on the credit line) in the future, if requested. There can be no assurance that we will meet our covenants to Mercantile Discount Bank or that Mercantile Discount Bank will waive non-compliance with any such covenants in the event that we do not meet them. Our ability to raise capital via convertible debt or equity financing arrangements with third parties for the re-payment of our bank loans may be impacted by the limited liquidity of our Ordinary Shares on the OTCQB. If we fail to timely effect any repayment of these loans, the relevant bank may demand immediate repayment of the outstanding debts and all interest thereon and would be entitled to exercise any remedies available to it. That would have a material adverse effect on our business. For more information, please see “Item 5. Operating and Financial Review and Prospects— Liquidity and Capital Resources—Sources of Cash—Bank Financing” and “Item 5. Operating and Financial Review and Prospects— Liquidity and Capital Resources—Sources of Cash— Government Guaranteed Bank Financing.”

We substantially reduced the number of our employees several years ago, and, as a result, may be unable to meet certain revenue objectives and sustain profitability.

Several years ago we determined that we had an excess of resources resulting from past acquisitions and took action to reduce our headcount. These actions resulted in a reduction of our headcount from 148 in 2005 to 88 at the end of December 2007. During 2008, we further reduced our headcount to 67 employees. In December 2011, we further reduced our headcount to 60 employees as a result of the sale of our Australian subsidiary, but we increased our headcount since, such that as of March 31, 2014 it consists of 67 employees. Although we believe that we currently have sufficient resources available to meet and support our current obligations in relation to our current staff, we may not be able to maintain this headcount. If we are forced to reduce headcount further, our ability to meet our growth goals, and to sustain and enhance our business and operations, may be adversely impacted.

We may need to expand our sales, marketing, research and development and professional services organizations but may lack the resources to attract, train and retain qualified personnel, which may hinder our ability to grow and meet customer demands.

While we conducted reductions in the number of our employees as described above, due to operational needs, we may need to reverse course and expand our headcount beyond our current staff in order to increase market awareness and sales of our products. We may also need to increase our quality assurance, technical and customer support staff to support new customers and the expanding needs of existing customers. Generally, the training period for these new positions can take a significant amount of time before these personnel can provide support to our customers. In addition, there is competition for qualified personnel (especially senior employees). Competition for qualified professional employees may lead to increased labor and personnel costs. If we need to hire additional employees and are unable to attract, train, motivate and retain qualified personnel, we may not be able to achieve our objectives, and our business could be harmed.

We may not be able to compete effectively for the personnel that we need. In a number of our key markets and locations, particularly Israel and the US, the competition for senior employees is very intense, and the process of locating, training and successfully integrating qualified personnel into our operations can be lengthy and expensive. Even in times of economic downturn, competition for these employees is high, because of the limited number of people available with the necessary technical and sales skills and understanding of our products and technology. Any loss of members of senior management or key technical personnel, or any failure to attract or retain highly qualified employees as needed, could materially adversely affect our ability to achieve our research and development and sales objectives.

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Historically, our revenues have been concentrated in a few large orders and a small number of customers. Our business could be adversely affected if we lose a key customer.

A significant portion of our revenues each year has been derived from large orders from a small number of customers which are not necessarily the same customers each year. In 2010, four customers each accounted for approximately 6% or more of our revenues, and such revenues represented, in the aggregate, 32% of our total revenues. In 2011, two customers each accounted for approximately 6% or more of our revenues, and such revenues represented, in the aggregate, 13% of our total revenues. In 2012, four customers each accounted for approximately 6% or more of our revenues, and such revenues represented, in the aggregate, 32% of our total revenues. In 2013, four customers each accounted for approximately 6% or more of our revenues, and such revenues represented, in the aggregate, 33% of our total revenues. We do not expect that the four customers accounting for 33% of our revenues during 2013 will generate a substantial percentage of our revenues in the future. However, we do expect that a significant portion of our future revenues will continue to be derived from a relatively small number of customers. We cannot assure you that we will continue to attract such substantial customers that will purchase our products and services in the future. The failure to secure new key customers, when coupled with the loss of key customers from the previous year or a significant reduction in sales to a key customer from the previous year, would cause our revenues to significantly decrease and make it significantly more difficult for us to be profitable.

Our sales cycle is variable and often long and involves investment of significant resources on our part, but may never result in actual sales and we may therefore suffer additional losses.

Our sales cycle from our initial contact with a potential customer to the signing of a license and related agreements has historically been lengthy and variable. We generally must educate our potential customers about the use and benefit of our products and services, which can require the investment of significant time and resources, causing us to incur most of our product development and selling and marketing expenses in advance of a potential sale. In addition, a number of companies decide which products to buy through a request for proposal process. In those situations, we also run the risk of investing significant resources in a proposal that results in a competitor obtaining the desired contract from the customer or in a decision by a customer not to proceed. The purchasing decisions of our customers are subject to the uncertainties and delays of the budgeting, approval and competitive evaluation processes that typically accompany significant capital expenditures. If our sales cycles lengthen further, our quarterly operating results may become less predictable and may fluctuate more widely than in the past. Due to the relatively large size of some orders, a lost or delayed sale could have a material adverse effect on our revenues and operating results.

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If we are unable to accurately predict and respond to market developments or demands, our business may be adversely affected.

The market for mobile workforce management software solutions is evolving. This makes it difficult to predict demand and market acceptance for our products. Changes in technologies, industry standards, customer requirements and new product introductions by existing or future competitors could render our existing products obsolete and unmarketable, or require us to develop new products. We have limited development resources to expend on product development. Therefore, we may be unable to timely develop products that meet the market’s future needs. If we were to experience a significant increase in the number of customers, or were to decide to significantly increase our development of new product offerings, or both, we would need to expend significant amounts of money, time and other resources. This could strain our personnel and financial resources.

We may be adversely impacted if are unable to adjust our revenue model in response to a market trend that involves decreased initial investments by customers in products such as ours and shift to cloud-based software-as-a-service.

One trend that our target markets are undergoing is a decrease in the average size of initial investments by customers in mobile solutions for workforces. In some of our markets this trend may take longer than in others. The pattern of smaller initial deal size coincides with the expected shift from traditional on-premises deployment of our products to the cloud-based software-as-a-service, or SaaS, model. This shift has been occurring faster than we expected. Although this shift has long-term benefits in the form of a more stable future revenue stream for us, the tendency of customers to shift to the SaaS model in order to lower up-front investment does impact our short term growth rate. SaaS, combined with general macro-economic concerns, has moderated buyers’ tolerance for risk versus price, thereby encouraging a smaller initial deployment size than we have seen in the past.

Further, as customers become more acquainted with cloud-based SaaS, there is a greater expectation for low initial financial investment. In order to remain competitive and satisfy low initial customer outlay, it may require us to provide a low-cost implementation which could impact our revenues.

During the past few years, we have experienced fluctuation in the mix of our revenues from software licenses and services. If either or both of these trends continue, it may adversely affect our gross margins and profitability.

Our revenues from the sale of software licenses have been variable over the past three years, decreasing from approximately $1.55 million in 2011 to $1.15 million in 2012, and then increasing to approximately $1.7 million in 2013. Our revenues from services increased during this same three year period, from approximately $8.1 million in 2011 to approximately $9.6 million in 2012 and approximately $9.9 million in 2013. Both of these trends have had a direct impact on our gross margins and profitability. Our gross margins from software licenses is substantially higher than our gross margin from services, since our cost of services, which includes expenses of salaries and related benefits of the employees engaged in providing the services, is substantially higher than our cost of software licenses. However, a decline in the volume of services revenues that we generate (regardless of such services’ relative lesser profitability) may in any case have an adverse direct impact on our overall gross margins and profitability if not accompanied by a countervailing increase in the amount of revenue from software licenses. If software license revenues decline, or if services revenues decline and are not accompanied by a countervailing increase in software license revenues, our gross margins and profitability may be adversely affected.

If we fail to improve our margins on services revenues in the future, our results of operations could suffer.

Our margins on services revenues have been fairly consistent in the two years period prior to 2013. In both 2012 and 2011, our margins on services revenues were 57%, whereas in 2013 our margins increased to 66%. In order to maintain or continue to improve our margins on services revenues, we will need to maintain or increase the efficiency and utilization of our services personnel, consistently control our costs, and increase the volume of our services revenues. There is no assurance that we will be able to maintain or improve our services margins, or that they will not decline in the future.

Our ability to maintain or increase our revenues may depend on our ability to make sales through third parties.

We are dependent, in part, upon resellers and channel partners to generate a substantial portion of our revenues. We expect this dependence to continue and potentially increase due to our limited internal sales and marketing resources in existing markets and due to our desire to penetrate new vertical markets for our products in North America and expand into new geographic markets for our products outside of North America. As a result of the limited resources and capacities of many resellers and channel partners, even if we manage to maintain and expand our relationship with such resellers and channel partners, we may be unable to attain sufficient focus and resources from them so as to meet all of our customers’ needs. If anticipated orders from these resellers and channel partners fail to materialize, or if our current business agreements with them are terminated, our business, operating results and financial condition will be materially adversely affected.

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If we are unable to maintain or expand our relationships with third party providers of implementation and consulting services, we may be unable to increase our revenues.

To focus more effectively on our core business of developing and licensing software solutions, we need to establish and maintain additional relationships with third parties that can provide implementation and consulting services to our customers. Third-party implementation and consulting firms can also be influential in the choice of mobile workforce management solutions by new customers. If we cannot establish and maintain effective, long-term relationships with implementation and consulting providers, or if these providers do not meet the needs or expectations of our customers, we may be unable to increase our revenues and our business could be seriously harmed. As a result of the limited resources and capacities of many third-party implementation providers, we may be unable to attain sufficient focus and resources from the third-party providers to meet all of our customers’ needs, even if we establish relationships with these third parties. If sufficient resources are unavailable, we will be required to provide these services internally, which could limit our ability to expand our base of customers. Even if we succeed at developing strong relationships with third-party implementation and consulting providers, we will still be subject to significant risk due to the fact that we cannot control the level and quality of service provided by these third parties.

Undetected defects may increase our costs and impair the market’s acceptance of our products and technology.

Our software products are complex and contain undetected defects, particularly when first introduced or when new versions or enhancements are released. Testing of our products is particularly challenging because it is difficult to simulate the wide variety of customer environments in several geographic markets into which our products are deployed. Despite testing conducted by us and our customers, we have in the past shipped product releases with some defects, some customers have cited possible defects, and we have otherwise discovered other defects in our products after their commercial shipment. Our products are frequently more critical to our customers’ operations compared to some other software solutions used by such customers, and, as a result, our customers may have a greater sensitivity to product defects relating to our products.

Defects may be found in current or future products and versions after the start of commercial shipment. This could result in:

• a delay or failure of our products to achieve market acceptance;

• adverse customer reactions;

• negative publicity and damage to our reputation;

• diversion of resources; and

• increased service and maintenance costs.

Defects could also subject us to legal claims. Although our license agreements contain limitation of liability provisions, these provisions may not be sufficient to protect us against these legal claims. The sale and support of our products, as well as our professional services, may also expose us to product liability claims.

Greater market acceptance of our competitors’ products or decisions by potential or actual customers to develop their own service management solutions could result in reduced revenues and reduced gross margins.

The markets for mobile workforce management applications and the automation of field service delivery are highly competitive, yet fragmented and stratified, although a number of our traditional competitors have been acquired by larger companies. We compete for the business of global or nationwide organizations that seek to support complex and sophisticated products across a variety of industries. We compete against companies such as, but not limited to, Service Power Technologies, CGI, Ventyx (acquired in 2010 by ABB Ltd.), ClickSoftware Ltd, TOA Technologies and ServiceMax. Our primary competitors in commercial and other general field service markets include enterprise application solution providers such as Astea International Inc. and Metrix LLC (acquired by IFS in 2012), along with traditional ERP and CRM software application vendors such as Oracle Corporation and SAP A.G.

Many of our competitors may have significant competitive advantages over us. These advantages may include greater technical and financial resources, more developed marketing and service organizations, greater expertise, and broader customer bases and name recognition than us. Our competitors may also be in a better position to devote significant resources to the development, promotion and sale of their products, and to respond more quickly to new or emerging technologies and changes in customer requirements. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase their ability to successfully market their products. We also expect that competition will increase as a result of consolidations in the industry. To the extent that we develop new products, we may begin to compete with companies with which we have not previously competed. We cannot assure you that competition will not result in price reductions for our products and services, fewer customer orders, deferred payment terms, reduced gross margins or loss of market share, any of which could materially adversely affect our business, financial condition and results of operations. In addition, a number of potential customers have the ability to develop, in conjunction with systems integrators, software solutions internally, thereby eliminating the need for suppliers like us. This could result in reduced revenues or lost business for us.

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We rely upon software from third parties. If we cannot continue using that software, we would have to spend additional capital to redesign our existing software and may not be able to compete in our markets. We may also be exposed to claims by the parties that license that software to us due to over-deployment of the software by our customers.

We utilize third-party software products to enhance the functionality of our products. Our business would be disrupted if functional versions of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required to spend additional capital to either redesign our software to function with alternate third-party software or develop these components ourselves. If functional versions of third-party software were either no longer available to us or no longer offered to us on commercially reasonable terms, we might be forced to limit the features available in our current or future product offerings, and the commercial release of our products could be delayed, which could materially adversely affect our business, financial condition and results of operations. Our reliance upon third-party software may also expose us to claims by the providers of the software that the software is being over-deployed by our customers.

Marketing and distributing our products outside of North America and other international operations may require us to incur increased expenses and may increase our exposure to risks with respect to which we may not be able to obtain adequate protection.

We market and sell our products and services in North America, Europe, Asia-Pacific and South America. We received 10% of our total revenue in 2011, 16% of our total revenue in 2012 and 17% of our total revenue in 2013 from sales to customers located outside of North America. In addition to our operations in the United States, we have marketing and support facilities and offices in Israel. These operations require, and the expansion of our existing operations and entry into additional international markets will require, significant management attention and financial resources. In addition, since our financial results are reported in dollars, decreases in the rate of exchange of non-dollar currencies in which we make sales relative to the dollar will decrease the dollar-based reported value of those sales. To the extent that decreases in exchange rates are not offset by a reduction in our costs, they may materially adversely affect our results of operations. Historically, we have not hedged our foreign currency-denominated account receivables and expense risks.

We are also subject to a number of risks customary for international operations that are described below in the risk factor titled, “Our business may become increasingly susceptible to numerous risks associated with international operations.”

We depend on key personnel. The loss of any key personnel could affect our ability to compete, and our ability to attract additional key personnel may also be impaired as a result.

Our future success depends on the continued service of our executive officers and other key personnel. All of our key management and technical personnel have expertise. The loss of any of these individuals could harm our business significantly. We have employment agreements with our executive officers, which generally require notification prior to departure, although relationships with these officers and key employees are at will. The loss of any of our key personnel could harm our ability to execute our business or financial strategy and compete successfully in the marketplace.

Any future acquisitions of companies or technologies may distract our management and disrupt our business.

In the past, we have acquired (as described below in “Item 4—Information on the Company”), and in the future, we may further acquire or make investments in other complementary businesses, technologies, services or products if appropriate opportunities arise, and we may engage in discussions and negotiations with companies about our acquiring or investing in those companies’ businesses, products, services or technologies. We cannot provide assurances that we will be able to identify future suitable acquisition or investment candidates, or, if we do identify suitable candidates, that we will have sufficient resources to complete such acquisitions or investments, will be able to make the acquisitions or investments on commercially acceptable terms or will be able to complete such acquisitions or investments at all. If we acquire or invest in another company, we could have difficulty assimilating that company’s personnel, operations, customers, technology or products and service offerings into our own. The key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses, consume cash resources, and adversely affect our results of operations. We may incur indebtedness or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing shareholders. We may also incur impairment charges for goodwill and other assets acquired related to acquired companies.

Our business may become increasingly susceptible to numerous risks associated with international operations.

Our facilities are located in the United States and Israel, This geographic dispersion consumes significant management resources that may place us at a disadvantage compared to our locally based competitors. In addition, our international operations are generally subject to a number of risks, including:

• differing technology standards and language requirements;

• changing product and service requirements in response to the formation of economic and marketing unions, including the European Economic Union;

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• economic or political changes in international markets;

• the uncertainty of protection for intellectual property rights in some countries, particularly in southeast Asia;

• multiple and possibly overlapping tax structures.

• foreign currency exchange rate fluctuations;

• longer sales cycles;

• multiple, conflicting and changing governmental laws and regulations;

• greater dependency on partners;

• time zone and cultural differences;

• protectionist laws and business practices that favor local competition;

• difficulties in collecting accounts receivables and longer collection cycles; and

• political and economic instability.

We expect international revenues to increase as a percentage of total revenues (as was the case in 2013 relative to 2012 and 2011), and we believe that we must continue to expand our international sales and professional services activities in order to be successful. Our international sales growth will be limited if we are unable to expand our international sales management and professional services organizations either through a direct presence in local markets or through channel partners. If we fail to manage our geographically dispersed organization, we may fail to execute our business plan, and our revenues may decline.

Risks Related to our Intellectual Property

Our channel and strategic partner strategy may expose us to additional risks relating to intellectual property infringement.

Our increased reliance on our channel and strategic partners may increase the likelihood of the infringement of our intellectual property. As we deepen our ties with our channel and strategic partners, the number of people who are exposed to, and interact with, our software and other intellectual property will increase. Despite our best efforts to protect our intellectual property, our channel or strategic partners, or their employees or customers, may copy some portions of our products or otherwise obtain and use information and technology that we regard as proprietary. Our channel or strategic partners might also improperly incorporate portions of our technology into their own products or otherwise exceed the authorized scope of their licenses to our technology. If we are unable to successfully detect and prevent infringement and/or to enforce our rights to our technology, our revenues may be negatively impacted and we may lose competitive position in the market.

We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively.

Our success and ability to compete are substantially dependent upon our internally developed technology. Other than our trademarks, most of our intellectual property consists of proprietary or confidential information that is not subject to patent or similar protection. In general, we have relied on a combination of technical leadership, trade secret, copyright and trademark law and nondisclosure agreements to protect our proprietary know-how. Unauthorized third parties may attempt to copy or obtain and use the technology protected by those rights. Any infringement of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Policing unauthorized use of our products is difficult and costly, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States, such as in certain countries in Southeast Asia.

In connection with some of our licensing agreements, we have placed, and in the future may place, our software in escrow. The software may, under specified circumstances, be made available to our customers and resellers and this may increase the likelihood of misappropriation or other misuse of our software.

Substantial litigation over intellectual property rights exists in the software industry. We expect that software products may be increasingly subject to third-party infringement claims as the functionality of products in different industry segments overlaps. We believe that many industry participants have filed or intend to file patent and trademark applications covering aspects of their technology. We cannot be certain that they will not make a claim of infringement against us based on our products and technology. Any claims, with or without merit, could:

• be expensive and time-consuming to defend;

• cause product shipment and installation delays;

• divert management’s attention and resources; or

• require us to enter into royalty or licensing agreements to obtain the right to use a necessary product or component.

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Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all, and even if available on acceptable terms, shall increase our expenses and may materially affect our results of operations adversely. A successful claim of product infringement against us and our failure or inability to license the infringed or similar technology could have a material adverse effect on our business, financial condition and results of operations.

Security breaches could compromise sensitive information belonging to us or our customers and could harm our business (including our intellectual property) and reputation.

The safeguarding of our information technology infrastructure is important to our business. A cyber-attack that bypasses our information technology (IT) security systems causing an IT security breach may lead to a material disruption of our IT business systems and/or the loss of business information, resulting in adverse business impact. Adverse effects could include:

• adversely affected future results of operations due to the theft, destruction, loss, misappropriation or release of our confidential data or our intellectual property;

• operational or business delays resulting from the disruption of IT systems and subsequent clean-up and mitigation activities; and

• negative publicity resulting in reputation or brand damage with our customers, partners or industry peers.

Risks Related to the Ownership of our Ordinary Shares

Our Ordinary Shares are quoted on the OTCQB, and previously were quoted on the Pink Sheets, which has adversely affected, and may continue to adversely affect, the market price of, and trading market for, our Ordinary Shares.

On June 12, 2007 our Ordinary Shares were delisted from the NASDAQ SmallCap Market (now known as the NASDAQ Capital Market) and became eligible for quotation and trading on the Pink Sheets. On December 14, 2007, our Ordinary Shares became eligible for quotation and trading on the OTCBB under the ticker symbol VRYAF. On September 11, 2008, due to our delinquency with respect to the filing of our annual report on Form 20-F for the year ended December 31, 2007, our Ordinary Shares ceased to be eligible for quotation on the OTCBB and were removed from the OTCBB. Following the removal from the OTCBB, our Ordinary Shares became immediately eligible for quotation and trading on the Pink Sheets. On March 4, 2010, our Ordinary Shares became eligible once again for quotation and trading on the OTCBB, and, beginning in April 2010, with the launch by OTC Markets Group of its new OTCQB marketplace for reporting issuers who are current in their reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, our Ordinary Shares began to be quoted in that marketplace as well. In October 2010, our Ordinary Shares ceased to be quoted on the OTCBB and are currently quoted only on the OTCQB.

The limited volume of trading in our Ordinary Shares on the OTCQB has materially impaired, and may continue to materially impair, the ability of our shareholders to buy and sell our Ordinary Shares, and has had, and could continue to have, an adverse effect on the market price and the trading market for our Ordinary Shares. Such factors could also significantly impair our ability to raise capital should we desire to do so in the future or to utilize our Ordinary Shares as consideration in acquisitions. Furthermore, should we once again fail to remain current with our Exchange Act reporting, our Ordinary Shares could be removed from the OTCQB and once again be quoted on the Pink Sheets, which would exacerbate the above-identified problems related to liquidity, market price and trading market for our Ordinary Shares.

The market price of our Ordinary Shares may be volatile and you may not be able to resell your shares at or above the price you paid, or at all.

The stock market in general experiences extreme price and volume fluctuations. The market prices of securities of technology companies have been extremely volatile, and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations could adversely affect the market price of our Ordinary Shares. The market price of our Ordinary Shares fluctuated substantially between $0.44 and $2.74 during 2013 and between $0.45 and $1.08 during 2012, and increased overall from $0.58 on December 31, 2012 to $2.73 on December 31, 2013. The market price of our Ordinary Shares increased during the first four months of 2014, to $3.91 on April 30, 2014, decreased during May 2014 to $2.70, increased during June 2014 to $3.12, and may continue to fluctuate substantially due to a variety of factors, including:

• the limited volume of trading in our Ordinary Shares on the OTCQB;

• any anticipated or actual fluctuations in our financial condition and operating results;

• our inability to meet any guidance or forward looking information, if provided;

• public announcements concerning us or our competitors;

• the introduction or market acceptance of new service offerings by us or our competitors;

• changes in security analysts’ financial estimates for us or other companies;

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• changes in generally accepted accounting principles that impact how we calculate our financial results;

• sales of our Ordinary Shares by existing shareholders;

• the limited market for our Ordinary Shares;

• the use of our Ordinary Shares for the acquisition of the outstanding shares or assets of other companies;

• our need to raise additional capital through private or public debt or equity financings;

• changes in political conditions in Israel; and

• the current economic uncertainty in the U.S. and globally.

• the likelihood that we will consummate the currently anticipated transaction whereby we will be acquired by Verisae, Inc.

In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may be the target of such litigation in the future. Securities litigation could result in substantial costs and divert our management’s attention and resources, which could cause serious harm to our business.

We have never paid cash dividends and have no intention to pay cash dividends in the foreseeable future.

We have never paid cash dividends on our Ordinary Shares and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain earnings, if any, for use in financing our operations and expanding our business, in particular to fund our research and development and sales and marketing activities, which enable us to capitalize on technological changes and new market opportunities. Any future dividend distributions are subject to the discretion of our board of directors and will depend on various factors, including our operating results, future earnings, capital requirements, financial condition, tax impact of dividend distributions on our income, future prospects and any other factors deemed relevant by our board of directors. The distribution of dividends also may be limited by Israeli law, which allows the distribution of dividends out of additional paid-in capital (as calculated in accordance with the Companies Law) only upon the permission of the court. You should not rely upon an investment in our Ordinary Shares if you require dividend income from your investment.

Future sales of our Ordinary Shares in the public market or issuances of additional securities could cause the market price for our Ordinary Shares to fall.

Since August 4, 2003, which marked the initial point at which we needed to raise additional capital after our initial public offering, the number of shares that we have outstanding has increased substantially. The increase in the number of our outstanding shares has been primarily due to (i) private equity and convertible debt financings which have raised approximately $13.6 million (excluding transaction-related expenses) from 2003 to the present time (see the “Liquidity and Capital Resources” sub-section of Item 5, under the headings “How We Have Financed Our Business” and “Sources of Cash”), (ii) our acquisition of Utility Partners, Inc. in July 2004, which resulted in the issuance of 179,697 Ordinary Shares, and (iii) our acquisition of e-Wise Solutions in June 2005, which resulted in the issuance of an aggregate of 111,156 Ordinary Shares.

As of June 23, 2014, we have reserved up to 1,178,000 Ordinary Shares for issuance under our share option plans, under which 36,534 options have been exercised, the restrictions on 807,682 restricted shares have lapsed and the restrictions on 210,000 restricted shares have not lapsed yet as of June 23, 2014. The sale, or availability for sale, of such substantial quantities of our Ordinary Shares may have the effect of further depressing the market price of our stock. In addition, a large number of our Ordinary Shares that were previously subject to resale restrictions are currently eligible or shall soon be eligible for resale into the public market.

We may continue to issue equity or convertible securities, and the issuance of such securities could be dilutive to our shareholders. Certain warrants and options, when issued, may have an exercise price set at fair value, and we may therefore be required to reflect appropriate charges to our income in our financial statements. We have provided registration rights in the past to certain shareholders and may continue to do so in the future, which would ease the resale of Ordinary Shares that would otherwise be subject to securities law resale restrictions, thereby potentially contributing to the depression of the market price of our Ordinary Shares.

Our executive officers, directors and affiliated entities will be able to influence matters requiring shareholder approval and they may disapprove actions that you vote to approve.

As of June 23, 2014, our executive officers and directors serving as of such date, and entities affiliated with them, beneficially owned, in the aggregate, approximately 33.5% of our outstanding Ordinary Shares. There are no Ordinary Shares that may be issued upon exercise of options and warrants or vesting of restricted shares that are exercisable, convertible or that have vested, or that will become exercisable, convertible or will vest, within 60 days of June 23, 2014. Such percentage does not take into account restricted Ordinary Shares that have been granted to executive officers and directors, the restrictions related to which will lapse more than 60 days after June 23, 2014. These shareholders, if acting together, will be able to significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions.

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Risks Related to Our Location in Israel

It may be difficult to effect service of process and enforce judgments against directors, officers and experts in Israel.

We are organized under the laws of the State of Israel. Several of our executives, directors, certain research and development employees, and some of the experts upon whom we rely for key services, are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside of the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any of those persons. It may also be difficult to enforce civil liabilities under United States federal securities laws in actions instituted in Israel.

Political, economic and military conditions in Israel could negatively impact our business.

Our principal research and development facilities are located in Israel. We are directly influenced by the political, economic and military conditions affecting Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, which varies in degree and intensity, has caused security and economic problems in Israel. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations. We cannot assure you that ongoing or revived hostilities related to Israel will not have a material adverse effect on us or our business and on our share price. Several Arab countries still restrict business with Israeli companies and these restrictions may have an adverse impact on our operating results, financial condition or the expansion of our business. We could be adversely affected by restrictive laws or policies directed towards Israel and Israeli businesses. Despite the progress towards peace between Israel and its Arab neighbors, the future of these peace efforts is uncertain and although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September 2000 and has continued with varying levels of severity into 2013. In November 2012, when Hamas increased the scope and intensity of its rocket attacks against Israeli civilian targets, Israel commenced a military operation in Gaza in an attempt to prevent the rocket attacks and disrupt the capabilities of the militant organization. Direct negotiations between Israel and the Palestinian Authority with the ultimate aim of reaching an official “final status settlement” are currently taking place, but it is by no means clear if, and when, they will be finalized. In addition, Israel faces threats from more distant neighbors, in particular, the Islamic Republic of Iran, an ally of Hezbollah and Hamas.

Since December 2010, a wave of demonstrations and civil protests has been taking place throughout the Arab states of the Middle East and North Africa, which has so far resulted in regime change in several states, including Egypt, with whom Israel signed a peace treaty in 1979, and the outbreak of civil war in Syria. It is uncertain what impact these changes may have on Israel’s relations with its Arab neighbors, in general, or on our operations in the region, in particular. Were these changes to result in the establishment of new fundamentalist Islamic regimes or governments more hostile to Israel, or, for example, were the new Egyptian regime to abrogate its peace treaty with Israel, this could have serious consequences for the peace and stability in the region, raise additional political, economic and military challenges for Israel and could materially adversely affect our operations.

Furthermore, several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in the region continue or intensify. Such restrictions may seriously limit our ability to sell our products to customers in those countries.

Our business insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or that such coverage will be adequate or proportional to the actual direct and indirect damage. Any losses or damages incurred by us could have a material adverse effect on our business.

Our operations may be disrupted by the obligation of our personnel to perform military service.

Generally, all male adult citizens and permanent residents of Israel, under the age of 45 in some cases, are, unless exempt, obligated to perform up to 36-45 days of military reserve duty annually. Additionally, all Israeli residents of such ages are subject to being called to active duty at any time under emergency circumstances. Many of our employees are currently obligated to perform annual reserve duty. Although we have operated effectively under these requirements since we began operations, we cannot assess the full impact that these requirements may have on our workforce or business if political and military conditions should change, neither can we predict the effect on us that may result from any expansion or reduction of these obligations.

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We may be adversely affected if the shekel appreciates against the dollar or if the rate of devaluation of the shekel against the dollar is exceeded by the rate of inflation in Israel.

Most of our revenues are in U.S. dollars or are linked to the U.S. dollar, while a portion of our expenses, principally salaries and the related expenses for our Israeli operations, are incurred in shekels. We do not utilize hedging to manage currency risk, and, therefore, are exposed to the risk that the shekel may appreciate relative to the U.S. dollar, or that even if the shekel devaluates in relation to the U.S. dollar, that the rate of inflation in Israel will exceed such rate of devaluation or that the timing of such devaluation will lag behind inflation in Israel. Any of such scenarios would result in increased dollar cost of our operations. While the average representative exchange rate between the U.S. dollar and the NIS decreased during 2013, to NIS 3.6094 per one dollar for 2013, from NIS 3.8559 per one dollar for 2012, reflecting an appreciation of the shekel relative to the dollar over the course of 2013, thereby increasing the dollar-recorded value of our shekel-incurred expenses, in 2012 the trend had been the opposite with the average representative exchange rate between the U.S. dollar and the NIS increasing during 2012, to NIS 3.8559 per one dollar for 2012, from NIS 3.5781 per one dollar for 2011, reflecting a devaluation of the shekel relative to the dollar over the course of 2012. The Israeli consumer price index, which serves as a barometer of Israeli inflation, slightly escalated its rate of increase during 2013, growing at a rate of 1.8% , after growing at the rate of 1.6% in 2012 and in 2.2% in 2011. While these trends caused an adverse impact of shekel-dollar currency exchange rates and Israeli inflation on our results of operations in 2013, this trend could be reversed in future years.

NIS-linked balance sheet items may also create foreign exchange gains or losses, depending upon the relative dollar values of the NIS at the beginning and end of the reporting period, thereby affecting our net income and earnings per share. We cannot predict any future trends in the rate of inflation in Israel or the rate of appreciation or devaluation of the NIS against the dollar. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected.

Under current Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.

We currently have non-competition agreements with our employees. These agreements prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors. Israeli courts have in the past required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.

The government grants that we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions.

We have received in the past royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry and Trade of the Government of Israel, or the OCS, under the Law for the Encouragement of Industrial Research and Development, 1984, or the Research and Development Law, and the regulations promulgated thereunder. The terms of these grants prohibit us from manufacturing more than 10% of the products developed using these grants outside of Israel without special approvals. There is no assurance that we will receive such OCS approval. Even if we receive approval to manufacture these products outside of Israel, we may be required to pay increased royalties of the grant amount plus interest. If we elect to transfer more than an insubstantial portion of our manufacturing processes to contractors outside of Israel, we may be required to obtain the consent of the OCS and pay higher royalties to the OCS.

The Research and Development Law also provides that the technology and know-how developed under an approved research and development program may not be transferred to third parties inside or outside of Israel without the approval of the OCS (and, in the case of a transfer outside of Israel, absent certain circumstances). Such approval is not required for the sale or export of any products resulting from such research or development. Even if we receive approval to a transfer of technology outside of Israel, a percentage of the consideration paid for such transfer equal to the ratio of the aggregate amount of OCS grants received by us to the aggregate amount of all cash investments made in such technology, including the OCS grants, must be paid to the OCS.

These restrictions may impair our ability to outsource manufacturing or engage in similar arrangements for those products or technologies. In addition, if we fail to comply with any of the conditions imposed by the OCS, we may be required to refund any grants previously received, together with interest and penalties.

Our United States investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Although we believe that we were not a passive foreign investment company in 2013, we cannot assure our shareholders that we will not be treated as a passive foreign investment company in 2014 or in future years. We would be a passive foreign investment company if (i) 75% or more of our gross income in a taxable year, including the pro rata share of the gross income of any company, US or foreign, in which we are considered to own 25% of the shares by value, is passive income, or (ii) at least 50% of the average value of our assets (or possibly the adjusted bases of our assets in particular circumstances), including the pro rata share of the assets of any company in which we are considered to own 25% of the shares by value, in a taxable year produce, or are held for the production of, passive income. Passive income includes interest, dividends, royalties, rents and annuities. If we are or become a passive foreign investment company, many of our shareholders will be subject to adverse tax consequences, including:

• taxation at the highest ordinary income tax rates in effect during a shareholder’s holding period on some distributions on our Ordinary Shares and on the gain from the sale or other disposition of our Ordinary Shares;

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• the obligation to pay interest on taxes allocable to prior periods; and

• no increase in the tax basis for our Ordinary Shares to fair market value at the date of a shareholder’s death.

Item 4. Information on the Company

History and Development of the Company

Our legal name, which also serves as our commercial name, is ViryaNet Ltd. We were incorporated and registered in Israel on March 13, 1988 under the name R.T.S. Relational Technology Systems Ltd. We changed our name to RTS Business Systems Ltd. on September 7, 1997 and to RTS Software Ltd. on February 1, 1998. On April 12, 2000, we changed our name to ViryaNet Ltd. The principal legislation under which we operate is the Israeli Companies Law, 5759-1999, as amended, which we refer to as the Companies Law.

Our registered office is located at 8 HaMarpe Street, Science Based Industries Campus, P.O. Box 45041, Har Hotzvim, Jerusalem, 91450, Israel, and our telephone number is 972-2-584-1000. We have appointed our United States subsidiary, ViryaNet, Inc., located at 112 Turnpike Road, Westborough, Massachusetts 01581, as our agent for service of process.

Over the past 26 years, we have developed, marketed, and supported field service software applications that have provided companies with solutions that improve the quality and efficiency of complex service business processes. During this period of time, numerous customers around the world have deployed our solutions.

On September 19, 2000, we completed our initial public offering, or IPO, and our Ordinary Shares began trading on the NASDAQ National Market (now known as the NASDAQ Global Market). Pursuant to the IPO, we issued and sold 80,000 Ordinary Shares for net proceeds of approximately $25.6 million.

On October 29, 2001 our Ordinary Shares began trading on the Tel Aviv Stock Exchange in Israel and we became a dual listed company. On March 4, 2004, we requested to be delisted from the Tel Aviv Stock Exchange, and following such request, we received the confirmation of the Tel Aviv Stock Exchange that our Ordinary Shares were delisted on June 3, 2004.

On February 25, 2002, we acquired the outstanding shares of iMedeon, a provider of mobile workforce management solutions to the utilities sector. iMedeon was a privately held company, headquartered in Alpharetta, Georgia. As a result of the acquisition, iMedeon became a wholly-owned subsidiary of ViryaNet, Inc., which is a wholly-owned subsidiary of ViryaNet Ltd.

On May 1, 2002, we effected a one (1) for ten (10) reverse share split, issuing one new Ordinary Share, of NIS 1.0 par value per share, in exchange for every ten Ordinary Shares, of NIS 0.1 par value per share, that were then outstanding.

On September 5, 2002, we were notified by the NASDAQ National Market (now known as the NASDAQ Global Market) that we were not in compliance with then NASDAQ Marketplace Rule 4450(a)(2) (currently NASDAQ Listing Rule 5450(b)(1)(C)) since we were unable to maintain a minimum market value of $5,000,000 for our publicly held shares, and were informed that we had until December 4, 2002 to regain compliance. Due to the economic and market conditions affecting our valuation, we concluded that we would request a transfer of our securities listing from the NASDAQ National Market to the NASDAQ SmallCap Market (which later became known as the NASDAQ Capital Market). The transfer was approved on December 20, 2002 and the trading of our Ordinary Shares on the NASDAQ SmallCap Market began on December 31, 2002.

On July 29, 2004, we acquired the outstanding shares of Utility Partners, a provider of mobile workforce management solutions to the utilities sector. Utility Partners was a privately held company, headquartered in Tampa, Florida. As a result of the acquisition, Utility Partners became a wholly-owned subsidiary of ViryaNet, Inc., which is a wholly-owned subsidiary of ViryaNet Ltd.

On June 15, 2005, we acquired, through our newly formed Australian subsidiary ViryaNet Pty Ltd, substantially all of the assets of e-Wise Solutions of Australia, a provider of front-office automation solutions to the utilities sector. e-Wise was a privately held business, headquartered in Melbourne, Australia. ViryaNet Pty Ltd was a wholly-owned subsidiary of ViryaNet, Inc.

On January 17, 2007, we effected a one (1) for five (5) reverse share split, issuing one new Ordinary Share, of NIS 5.0 par value, in exchange for every five Ordinary Shares, of NIS 1.0 par value, then outstanding, and issuing one (1) new Preferred A Share, of NIS 5.0 par value, in exchange for every five (5) Preferred A Shares, of NIS 1.0 par value then outstanding.

On April 23, 2007, we dissolved our Japanese subsidiary, ViryaNet Japan K.K., and replaced our direct presence in Japan with a reseller arrangement with a firm based in Tokyo, Japan, Octpark Ltd., led by the former general manager for ViryaNet Japan. Prior to the dissolution, our office lease expired on November 30, 2006 and we terminated the remainder of our full-time employees in Japan effective December 31, 2006.

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On June 4, 2007, we voluntarily requested from the NASDAQ Stock Market that our Ordinary Shares be delisted from the NASDAQ Capital Market on June 11, 2007. We were subsequently advised by NASDAQ that our Ordinary Shares would be delisted from the NASDAQ Capital Market on June 12, 2007, at which time our Ordinary Shares became immediately eligible for quotation and trading on the Pink Sheets. On December 14, 2007, our Ordinary Shares began to be quoted and traded on the OTCBB under the trading symbol VRYAF.OB.

On September 11, 2008, due to our delinquency with respect to the filing of our annual report on Form 20-F for the year ended December 31, 2007, our Ordinary Shares ceased to be eligible for quotation on the OTCBB and were removed from quotation on the OTCBB. Following the removal from the OTCBB, our Ordinary Shares became immediately eligible for quotation and trading on the Pink Sheets.

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On March 4, 2010, our Ordinary Shares became eligible again for quotation and trading on the OTCBB. In April 2010, upon the launch by OTC Markets Group of its new OTCQB marketplace for reporting issuers who are current in their Exchange Act reports, our Ordinary Shares began to be quoted in that marketplace as well. In October 2010, our Ordinary Shares ceased to be quoted on the OTCBB and are currently quoted only on the OTCQB.

During fiscal 2011, we decided to explore strategic alternatives to our direct sales activities in Australia in order to focus on indirect sales channels in the Asia-Pacific region, which decision culminated in the sale of our wholly owned subsidiary in Australia, ViryaNet PTY Ltd., on December 31, 2011, for a purchase price of $340,000, payable in interest-bearing installments. ViryaNet PTY revenues and assets constituted less the 10% of our revenues and assets during the three fiscal years 2009-2011.

During fiscal year 2011, we also decided to strike off our wholly inactive subsidiary in the U.K., ViryaNet Europe Ltd, by filing an application with the U.K. Companies House in December 2011, which became effective in April 2012.

Our cash used towards capital expenditures (i.e., for the purchase of property and equipment) has been $24,000, $29,000 and $83,000 for the years ended December 31, 2013, 2012 and 2011, respectively. The significant decrease in capital expenditures during 2012 and 2013 was due to the absence of a more significant number of purchases of computers and software, which had been made and completed in 2010 and 2011. We believe that our capital expenditure program is sufficient to maintain our current level and quality of operations. We review our capital expenditure program periodically and modify it as required to meet current needs. For 2014, we anticipate spending approximately $60,000 towards capital expenditures.

Business Overview

We are a provider of software solutions that optimize and allow for the continuous improvement of service processes for mobile workforces. Optimizing both simple and complex field service work, our solutions schedule and dispatch resources, enable mobile field communication, and provide visibility and operational guidance. Using an integrated approach, we help our customers attain the maximum benefits from our mobile workforce management solution. This integrated approach consists of a Performance Management practice and an innovative product, ensuring our customers can implement change, enable differentiation, and provide for continuous improvement. By applying Performance Management methodologies and visualizing data in balanced views, ViryaNet helps customers tune their business processes and planning policies to suit existing and evolving business goals. We have approximately 60 customers worldwide, whom we service from our support offices in the United States and Israel. We target companies in the utility, telecommunications, retail, healthcare and general service industries that have distributed mobile workforces, strong commitments to customer satisfaction, extensive service agreements, and a need to improve their service operations. We believe that these industries provide substantial growth opportunities for our products and services.

Our historical growth has occurred organically as well as through acquisitions. In February 2002, we acquired Alpharetta, Georgia-based iMedeon, Inc. In July 2004, we acquired another mobile workforce management company, Tampa, Florida-based Utility Partners, and in June 2005, we acquired substantially all of the assets of e-Wise Solutions of Australia, a provider of front-office automation solutions to the utilities sector, which we later sold as part of our sale of ViryaNet PTY Ltd. in December 2011. These acquisitions have provided us with domain expertise, an installed base of customers in the utilities market, our primary market focus, and significant partnerships, and have furthermore enabled us to incorporate additional features, functions and technology into our advanced product platform.

Business Strategy

Our goal is to become the leader in the mobile workforce management software market. We intend to achieve this goal by increasing our sales and marketing efforts in North America, growing our business in target sectors through our partner network as well as through our direct sales force; increasing our revenues from Europe, Asia/Pacific and South America by expanding our partner network, adding resources in support of international activities, establishing a local presence in certain targeted geographic markets; and intensifying our focus on account management and customer support to enable follow-on sales into our installed base.

Markets

We deliver state-of-the-art solutions specific to the needs of key markets, including utilities, telecommunications and cable/broadband companies, retail/grocery companies, healthcare, insurance companies, and general service providers. We reach prospects within each of these markets through our direct sales force, supported by marketing campaigns, as well as through our partner network, including, among others, GE Energy, Amdocs and Vodafone.

Utilities. The utilities market targeted by us consists of electric, gas and water companies. We see substantial opportunities within this market, as companies have a need to (i) add new technology to improve their service offering, (ii) replace their old technology in favor of an Internet and wireless-based solution model, and (iii) continue with the initial build-out of their systems infrastructure, especially in developing geographies.

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Telecommunications and Cable/Broadband. We target companies within the following segments of the telecommunications sector: cable and satellite, data services, fixed line services, and wireless communications services providers.

Healthcare. Within the healthcare sector, we target healthcare service providers that manage a mobile workforce of medical staff.

Retail. Within the retail sector, we target grocery companies, drug stores and pharmacies, retail marketing companies, and consumer packaged goods companies.

General Field Service. This includes heating, ventilation, and air conditioning; property maintenance; office and home appliance/equipment maintenance; and security companies — many of which require mobile workforce management solutions. We evaluate these companies on a case-by-case business in the context of their size, business processes, as well as our domain understanding and product’s “fit”.

Our revenues are derived mainly from the sale of software licenses and from maintenance and services that we provide in support of our software. The following table describes, for the periods indicated, the percentage of revenues represented by each of these categories of revenues in our consolidated statements of operations:

	Year Ended December 31,
	2013			2012			2011
Category of Revenues:
Software licenses		14.5	%		10.8	%		16.0	%
Maintenance and services		85.5	%		89.2	%		84.0	%
Total		100.0	%		100.0	%		100.0	%

The following table breaks down the revenues from our products and services by geographic market, stated as a percentage of total revenues for the periods indicated:

	Year Ended December 31,
Region	2013			2012			2011
North America		83.1	%		84.3	%		90.0	%
Europe		8.4			9.0			7.3
Asia Pacific		5.3			2.7			2.7
South America		3.2			4.0			—
Total		100.0	%		100.0	%		100.0	%

Our sales personnel operate through our United States subsidiary and cover North America, Europe, Asia Pacific and South America regions. Our sales and marketing staff consists of professionals in a variety of fields, including marketing and media relations, direct sales, technical sales consultants, product management, and business development. As of December 31, 2013, we employed 16 sales, marketing, product management and business development personnel.

We intend to expand our marketing and implementation capacity through the use of third parties, including systems integrators, vendors of complementary products and providers of service applications. By employing third parties in the marketing and implementation process, we expect to enhance sales by taking advantage of the market presence of these third parties.

Our North American strategy utilizes a direct sales model, supplemented by key partners like GE Energy. Our international strategy uses mostly indirect sales channels in order to sell effectively into local markets and perform certain implementation activities on our behalf. We expect to benefit from marketing programs and leads generated by these partners, as well as from cooperation from the sales forces of these partners in sales opportunities. We will continue to explore and establish indirect sales channels through relationships with agents, local resellers who offer complementary products and solutions, global systems integrators, and application service providers.

Outside of North America, we continue to utilize our global partners GE Energy, and Amdocs, along with our partner Vodafone, which has developed a specialized practice dedicated to the implementation of ViryaNet’s solutions and providing post-contract maintenance and support. All of our partners and their customers are supported by our business development, customer care, and professional services organizations in the United States and Israel.

Application service providers are used to provide our product to customers who wish to avoid the initial cost of our product combined with the required hardware platforms and infrastructure investments. Through an application service provider, customers are billed a monthly rental or subscription fee. We have two partners that have hosting capability, offering our products in software as a service (SaaS) model: Vodafone and Vertex Group.

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ViryaNet G4 Product Suite

ViryaNet’s fourth generation product suite, G4, provides web-based solutions which optimize the full life cycle of field service operations, including the creation of work orders, scheduling and dispatching field personnel, tracking equipment under warranty, managing spare parts inventory and receiving real-time reports from the field. ViryaNet typically issues one major version release of ViryaNet G4 every one to two years.

ViryaNet G4 is a comprehensive mobile workforce management platform that works for all of our customers’ service resources, solving real business challenges associated with a range of service-related business processes.

• Allows central management of all work and all resources.

• From simple to complex projects.

• For individuals, crews, sub-contractors and equipment.

• Delivers optimal plans, schedules and dispatching of mobile field workers.

• Forecasting demand and planning workforce buildup.

• Dynamic optimization of assignments for work and available resources.

• Real-time exception management.

• Enables mobile field workers to easily access information.

• Work plan and data; parts location; and time reporting.

• For any device, any network - online or offline.

• Provides service operations analytics.

• Historical, real-time and predictive analytics.

ViryaNet G4 Modules & Components

The ViryaNet G4 Product Suite helps a customer’s organization achieve operational excellence through automation, agility, and visibility. ViryaNet G4’s integrated process-oriented components address the full lifecycle of mobile workforce management, providing unmatched flexibility to start with a single component or the entire suite, depending on a customer’s business objectives. WithViryaNet G4, a customer’s service organization has the ability to plan, execute, and monitor long-term trends and short-term, dynamic events to continuously achieve operational goals.

Planning

Planning is a critical link to productivity in a customer’s business processes. If it is wrong, a customer loses ground to the competition. If it is right, a customer positions itself to optimize its response and meet budget and customer expectations. ViryaNet G4 enables:

• Strategic Planning

• Tactical Planning

• Schedule Optimization

Execution

A customer may have plans that differ from the “real world.” Each time a customer’s mobile workforce rolls out into the real world, the customer needs to be prepared to proactively deal with the exceptions to its plans. With ViryaNet G4, a customer can automate the “routine”, get real-time information on what is really happening, and receive alerts about exceptions, so the customer can handle these exceptions proactively. ViryaNet G4 provides [assistance] with the following:

• Dispatch Management

• Field Application

• Inventory & Asset Management

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Monitoring

Information is one of the most important assets people have. Normal business processes produce quantities of information at every step in the process. ViryaNet G4 gives our customers visibility into historical and real-time information and enables our customers’ reporting tools to share the wealth of information collected via ViryaNet G4, including by providing:

• Reports & Dashboards

Infrastructure

ViryaNet G4 offers tools to implement, configure, utilize, and maintain its full functionality, including:

• Software Lifecycle Management

Solutions

ViryaNet G4 provides our customers with best practices and specific out-of-the-box content with unique capabilities for the most challenging environments, enabling continuous field service operational excellence.

• BPM Blueprint for Mobile Workforce Management

• Smart Meter for Utilities

ViryaNet G4 - Key Differentiators

• Methodology/Practice - With ViryaNet our customers will maximize their opportunity to improve their business goals, implement change, enable differentiation, and provide for continuous improvement.

• Business-value focus approach

• Guide/build a performance management practice

• Planning - With ViryaNet G4 our customers can find the optimal operating point for their service organization, save dollars by eliminating inefficiencies in their workforce and provide better service.

• Plan for the moment and for the future

• Align daily schedules with their prioritized business objectives

• Model their entire service business

• User Experience - With ViryaNet G4 our customers’ employees will be more effective in the field and back in the office.

• Extend the usefulness of their field application

• Make better decisions when managing exceptions

• Extensibility - With ViryaNet G4 our customers can build on industry best practices, while cost-effectively integrating their service organization’s DNA with the overall solution.

• Leverage industry best practices

• Cost-effectively extend ViryaNet G4 to meet our customers’ unique business needs

ViryaNet Partnerships

The unique strength of the ViryaNet G4 platform, combined with our broad and modular service applications, has allowed us to form strategic alliances with world-class systems integrators (SI’s) and value-added resellers (VARs), including:

• Amdocs—a high technology company that offers integrated customer management solutions, enabling the world’s leading service providers to build stronger, more profitable customer relationships. ViryaNet is a member of the Amdocs OSS ecosystem, selected as its primary mobile workforce management provider.

• Vodafone—a European eBusiness solution provider, specializing in front-office applications for sales, marketing and customer service that positions ViryaNet G4 and mobile workforce management applications in the UK, with vast reach into continental Europe.

• GE Energy—a business unit of GE Power Systems and leading global supplier of strategic network solutions to the utilities industry. GE has integrated ViryaNet G4 and mobile workforce management application into its existing portfolio, and positions the ViryaNet offering to the utilities and telecommunications industry.

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• Vertex Group—a provider of business process outsourcing services for companies across a number of vertical markets, including utilities. Vertex offers, through its technologically advanced and highly secure data centers, the ViryaNet products to its customers who contract with Vertex to manage their applications and/or run their business processes in an outsourced capacity.

Competition

The markets for mobile workforce management applications and the automation of field service delivery are highly competitive, yet fragmented and stratified, although a number of our traditional competitors have been acquired by larger companies. We compete for the business of global or nationwide organizations that seek to support complex and sophisticated products across a variety of industries. We compete against companies such as, but not limited to, Service Power Technologies, Oracle, CGI, Ventyx (acquired in 2010 by ABB Ltd.), ClickSoftware Ltd, TOA Technologies and ServiceMax. Our primary competitors in commercial and other general field service markets include enterprise application solution providers such as Astea International Inc. and Metrix LLC (acquired by IFS in 2012), along with traditional ERP and CRM software application vendors such as Oracle Corporation and SAP A.G.

We compete against two primary types of field service solutions: Field service optimization vendors that focus on customer/engineer process optimization, which means getting the right technician to the right place at the right time, and End-to-end field service management vendors that look across the entire set of service processes (across verticals or applying vertical/industry focus).

We would normally apply a best-of-breed strategy using our product’s “secret sauce” when competing against the first group, and leverage our partners’ strategy when competing against the second.

Intellectual Property Rights

We rely primarily on a combination of trademarks, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights, as well as limiting access to the distribution of proprietary information. We cannot assure you that the steps taken to protect our intellectual property rights will be adequate to prevent misappropriation of our technology or to preclude competitors from independently developing such technology. Furthermore, we cannot assure you that, in the future, third parties will not assert infringement claims against us or with respect to our products.

As a general matter, the software industry is characterized by substantial litigation regarding patent and other intellectual property rights. Third parties may claim that we are infringing their intellectual property rights. We have certain indemnification obligations to customers with respect to the infringement of third party intellectual property rights by our products. There can be no assurance that infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect our business, financial condition or operating results. In the event of any adverse ruling in any such matter, we could be required to pay substantial damages, which could include treble damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third-party claiming infringement. There can be no assurance that a license would be available on reasonable terms or at all. Any limitations on our ability to market our products, any delays and costs associated with redesigning our products or payments of license fees to third parties or any failure by us to develop or license a substitute technology on commercially reasonable terms could have a material adverse effect on our business, financial condition and operating results.

There can be no assurance that others will not develop technologies that are similar or superior to our technology, or design around any licensing arrangements issued to us. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products or obtain and use information that we regard as proprietary. Policing any such unauthorized uses of our products is difficult, and although we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries, such as those in Southeast Asia, do not protect proprietary rights as fully as do the laws of the United States or Israel. There can be no assurance that our efforts to protect our proprietary rights will be adequate or that our competitors will not independently develop similar technology.

Regulatory Framework

Government regulations have not had a material impact on our business.

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Organizational Structure

We are organized under the laws of the State of Israel. We are the parent company of our direct and indirect wholly owned subsidiaries, all of which are specified in the table below.

Name of Subsidiary (1)	Country (and State, if applicable) of Incorporation
ViryaNet, Inc.	Delaware, USA
Utility Partners, Inc. (*)	Delaware, USA
iMedeon, Inc. (*)(**)	Georgia, USA

(*) Wholly-owned subsidiary of ViryaNet, Inc.

(**) Inactive

(1) In December 2011 we sold our Australian subsidiary ViryaNet Pty Ltd, and filed an application for striking off our United Kingdom subsidiary ViryaNet Europe Ltd., which became effective in April 2012.

Property, Plants and Equipment

We do not own any real property. We lease approximately 6,000 square feet of space in Jerusalem, Israel, used primarily for research and development, with an annual average rent of approximately $145,000. The lease agreement for these premises expires on October 31, 2015.

ViryaNet, Inc., our subsidiary located in Massachusetts, has relocated its facilities in June 2011 to a new location in Westborough, Massachusetts and leases 10,372 square feet of office space, which is utilized primarily for administrative, marketing, sales, service and technical support purposes, with an annual average rent of approximately $189,000. The lease agreement for these premises expires on December 31, 2016.

Utility Partners, Inc., the subsidiary of ViryaNet, Inc. located in Tampa, Florida, leases approximately 250 square feet of office space used primarily for services and technical support purposes. The lease agreement is renewable every six months upon mutual consent of our subsidiary and its landlord, with an annual rent of approximately $20,000.

Item 4A. Unresolved Staff Comments

Not applicable

Item 5. Operating and Financial Review and Prospects

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH YOUR REVIEW OF OUR “SELECTED FINANCIAL DATA” IN ITEM 3 ABOVE AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. SEE “CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS” IMMEDIATELY FOLLOWING THE TABLE OF CONTENTS ABOVE.

Overview

We are a provider of integrated mobile and Web-based software applications for workforce management and the automation of field service delivery. In addition, we provide software applications for spare parts logistics, contract management, and depot repair operations. Our mission is to provide companies with solutions that improve the quality and efficiency of their complex service business processes. With ViryaNet G4 Product Suite, our principal product, a service organization can quickly transition its complex field service business processes into a manageable, scalable Internet operation, with goals of increasing efficiency, quality of service, customer satisfaction, customer retention, and profitability. Using ViryaNet G4 Product Suite, our customers can manage the continuum of their service operations, from ensuring that the right person is in the right place at the right time with the right parts and information about the customer, to automating the repair processes utilizing the Web at the least cost.

Overview of Revenues

We derive revenues from licenses of our software products and from the provision of related services. Our operating history shows that a significant percentage of our quarterly software revenue results from orders placed toward the end of a quarter. Software license revenues are comprised of perpetual software license fees primarily derived from contracts with our direct sales clients and indirect partner channels. We recognize revenues in accordance with FASB Accounting Standards Codification “(ASC”) 985-605-15 (“Software Revenue Recognition”) and ASC 605-35-05 (“Accounting for Performance of Construction—Type and Certain Production—Type Contracts”).

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Services revenues are comprised of revenues from the performance of implementation, consulting, integration, customization, post-contract maintenance support and training services. Implementation, consulting, integration, customization and training services are billed at an agreed-upon price plus incurred expenses. Customers that license our products generally purchase these services from us or from our resellers and systems integrators. Post-contract maintenance support provides technical support and the right to unspecified software upgrades when and if available. Post-contract maintenance support revenues are charged to customers as a percentage of license fees, depending upon the level of support coverage desired by the customer.

We sell our products through our direct sales force and through relationships with system integrators, application service providers and resellers. Our sales cycle from our initial contact with a potential customer to the signing of a license and related agreements has historically been lengthy and variable. We generally must educate our potential customers about the use and benefit of our products and services, which can require the investment of significant time and resources, causing us to incur most of our product development and selling and marketing expenses in advance of a potential sale. In addition, a number of companies decide which products to buy through a request for proposal process. In those situations, we also run the risk of investing significant resources in a proposal that results in a competitor obtaining the desired contract from the customer or in a decision by a customer not to proceed.

The majority of our revenues are derived from customers in North America, with the balance generated by customers in the European, Asia Pacific and South America regions. The percentage of revenues derived from North America decreased moderately from 84.3% in 2012 to 83.1% in 2013, whereas the percentage of revenues derived from Asia-Pacific increased from 2.7% in 2012 to 5.3% in 2013. Revenues from the European region decreased slightly from 9.0% of total revenues in 2012 to 8.4% of total revenues in 2013. Revenues from South America, which we began selling our software and services to customers in 2012, also decreased slightly from 4% of total revenues in 2012 to 3.2% of total revenues in 2013. Achieving future growth in the percentage of revenues derived from regions outside of North America will depend upon the degree of success of our global partners, principally GE Energy, Vodafone and Amdocs, in closing license sales with new customers. Historically, a significant portion of our revenues has been derived from a small number of relatively large customers and we expect this trend to continue. See, among the above “Risk Factors” in Item 3, “Historically, our revenues have been concentrated in a few large orders and a small number of customers. Our business could be adversely affected if we lose a key customer.”

Overview of Cost of Revenues

Our cost of revenues consists of the cost of software license revenues and cost of maintenance and services. The cost of software license revenues consists mostly of costs of third-party software that is either embedded in our software or licensed for resale from third-party software providers to enhance the functionality of our software. For fiscal years prior to 2010 the cost of software license revenues also included amortization of acquired technology. The cost of acquired technology was established as part of the purchase price allocation related to the acquisitions of Utility Partners, Inc. and e-Wise Solutions and was amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up in accordance with ASC 350 (“Goodwill and Other Intangible Assets”). The cost of our acquired technology was fully amortized as of December 31, 2009 and no amortization cost was included in the cost of revenues since then. Cost of maintenance and services consists of (i) salaries and related expenses of our professional services organization employees, third-party consultants and contractors, (ii) third party software support, (iii) amortization of stock-based compensation, (iv) depreciation of fixed assets and (v) facilities and other administrative expenses incurred in support of these personnel. We expect the annual increase in the cost of services to approximate the growth of professional services revenue, if such revenues grow, on an annual basis.

Because our cost of maintenance and services includes all of the above-described categories of expenses and is therefore substantially higher than our cost of software licenses, our gross margin from maintenance and services is substantially lower than our gross margin from software licenses.

Overview of Operating Expenses

Operating expenses are categorized into research and development expenses, sales and marketing expenses, and general and administrative expenses.

Research and development expenses include costs relating to the development of our products. These costs consist primarily of (i) salaries and benefits for research and development employees, (ii) facilities and other administrative expenses, (iii) the cost of consulting development resources that supplement our internal development team, (iv) amortization of stock-based compensation and (v) depreciation of fixed assets. These expenses are presented net of any governmental or other grants and funded expenses. Due to the relatively short time between the date on which our products achieve technological feasibility and the date on which they generally become available to customers, costs subject to capitalization under ASC 985-20 have been immaterial and have been expensed as incurred.

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Sales and marketing expenses consist of (i) salaries and commissions for sales and marketing employees and consultants, (ii) office expenses, (iii) travel costs, (iv) printing and distribution expenses, (v) market research expenses, (vi) advertising and promotional expenses, (vii) facilities and other administrative expenses and (viii) amortization of stock-based compensation. For fiscal years prior to 2011 amortization of acquired customer relationship was included in sales and marketing expenses. The cost of customer relationship was established as part of the purchase price allocation related to the acquisitions of Utility Partners, Inc. and e-Wise Solutions, and was amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up in accordance with ASC 350. The cost of our customer relationship was fully amortized as of December 31, 2010, and no amortization cost was included in the cost of revenues in 2011, 2012 or 2013.

General and administrative expenses consist of (i) salaries and benefits for administrative, executive and finance personnel, (ii) information system costs, (iii) insurance costs, (iv) accounting expenses, (v) legal expenses, (vi) professional fees, (vii) facilities and other administrative expenses and (viii) amortization of stock-based compensation.

Amortization of stock-based compensation includes the amortization of stock-based compensation and expenses for stock -based awards granted to employees, directors and consultants in exchange for services. Stock-based compensation expense is amortized over the vesting schedule of the stock options or restricted shares using the straight-line approach, or, over the term of the services provided. These expenses are reported in the statement of operations under the applicable operating expense categories (i.e., cost of services, sales and marketing, research and development, and general and administrative) and not as a separate line item.

Our Reporting Currency

Our reporting currency is the United States dollar. Transactions and balances of subsidiaries whose functional currency is not the dollar have been translated to dollars under the principles described in ASC 830. Under this standard, assets and liabilities have been translated at period-end exchange rates and results of operations have been translated at average exchange rates. The exchange gains and losses arising from these translations were recorded as a separate component of accumulated other comprehensive losses in the shareholders’ equity section of our balance sheet. We disposed of those subsidiaries whose functional currency is not the dollar in 2011 and no exchange gains or losses related to these subsidiaries were recorded in 2012 and 2013.

Our Location in Israel

We are incorporated under the laws of the State of Israel, and our principal executive offices and principal research and development facilities are located in Israel. See Item 3 “Risk Factors – Risks Related to Our Location in Israel” for a description of Israel-related governmental, economic, fiscal, monetary or political polices or factors that have materially affected or could materially affect our operations.

Impact of Currency Fluctuation and Inflation

Since our revenues are generated in United States dollars and currencies other than Israeli shekel, and our financial results are reported in U.S. dollars, but a significant portion of our expenses (mainly personnel costs) is incurred and will continue to be incurred in shekels, our U.S. dollar-denominated results are influenced by the exchange rate between the U.S. dollar and the shekel. We do not utilize hedging transactions to manage currency risk. Therefore, we are exposed to the risk that the shekel may appreciate relative to the U.S. dollar, which would raise the dollar-value of our shekel-incurred costs, or that even if the shekel devaluates in relation to the U.S. dollar, that the rate of inflation in Israel will exceed such rate of devaluation or that the timing of such devaluation will lag behind inflation in Israel, which would also raise the amount of our shekel-incurred costs. This increase in the dollar-recorded cost of our Israeli operations could have a material adverse impact on our operating results and share price. We also do not own any market risk sensitive instruments. However, we may in the future undertake hedging or other transactions or invest in market risk sensitive instruments if we determine that it is necessary to offset these risks.

The average representative exchange rate between the U.S. dollar and the NIS, reflecting an average of buying and selling prices published by banks during the period, as published by the Bank of Israel, declined during 2013, to NIS 3.6094 per one dollar for 2013, from NIS 3.8559 per one dollar for 2012, reflecting an appreciation of the shekel relative to the dollar over the course of 2013. This appreciation had a negative impact on our financial results in 2013, as it increased the dollar-recorded value of our shekel-incurred expenses. See “Operating Results— Comparison of Fiscal Years Ended December 31, 2012 and 2013—Cost of Maintenance and Services” in this Item 5 below. In 2012, the trend had been the opposite, with the average representative exchange rate increasing to NIS 3.8559 per one dollar from NIS 3.5781 per one dollar for 2011, thereby decreasing the dollar-recorded value of our shekel-incurred expenses. The average representative exchange rate was as follows for each of the five most recent fiscal years:

Period	Exchange Rate
January 1, 2009 - December 31, 2009	NIS 3.933/$	1
January 1, 2010 - December 31, 2010	NIS 3.733//$	1
January 1, 2011 - December 31, 2011	NIS 3.578/$	1
January 1, 2012 - December 31, 2012	NIS 3.856/$	1
January 1, 2013 - December 31, 2013	NIS 3.609/$	1

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In 2013 the decrease in the exchange rate of the shekel relative to the dollar from NIS 3.733 per one dollar at the start of the year to NIS 3.471 per one dollar at the end of the year was continuous and consistent throughout the year. Since the start of 2014 (through April 30, 2014) the trend had been somewhat reversed and the exchange rate has increased to NIS 3.484 per one dollar as of April 30, 2014.

In 2012, despite the increase in the average representative exchange rate for the year as a whole relative to 2011 (reflecting higher exchange rates during most of 2012), the concluding months of 2012 saw a decrease in the exchange rate between the U.S. dollar and the NIS, such that from the start to the conclusion of 2012, the exchange rate actually decreased, from NIS 3.821 per one dollar at the start of the year to NIS 3.733 per one dollar at the end of the year.

The high and low exchange rates between the U.S. dollar and NIS during the 6 most recent months, as published by the Bank of Israel, have been as follows:

MONTH	HIGH (1 U.S. dollar = NIS)		LOW (1 U.S. dollar = NIS)
January 2014		3.507		3.483
February 2014		3.549		3.496
March 2014		3.504		3.459
April 2014		3.493		3.461
May 2014		3.490		3.447
June 2014		3.476		3.432

In 2013, the rate of Israeli inflation increased slightly to 1.8%, from 1.6% in 2012, while in 2012 the rate of Israeli inflation decreased to 1.6%, from 2.2% in 2011, after having decreased in 2011 as well, from 2.7% in 2010. As described above, reduced Israeli inflation impacts our financial results positively, by reducing the shekel-incurred costs of our Israeli operations. There can be no assurance that the rate of Israeli inflation will continue to remain low, as has been the case the past few years. Any significant increase in the rate of Israeli inflation may have an adverse impact on our dollar-recorded financial results. See the risk factor titled “We may be adversely affected if the NIS appreciates against the dollar or if the rate of devaluation of the NIS against the dollar is exceeded by the rate of inflation in Israel” in Item 3 above.

Also, NIS linked balance sheet items may create foreign exchange gains or losses, depending upon the relative U.S. dollar values of the NIS at the beginning and end of the reporting period, affecting our net income and earnings per share. The caption “Financial expenses, net” in our consolidated financial statements includes the impact of these factors as well as traditional interest income or expense.

Seasonality

Our operating results are generally not characterized by a seasonal pattern.

Recently Issued Accounting Standards

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires companies to disclose significant amounts that have been reclassified out of accumulated other comprehensive income. Amounts that are required to be reclassified in their entirety to net income must be disclosed either on the face of the income statement or in the notes to the financial statements. Amounts that are not required to be reclassified in their entirety to net income in the same reporting period must be disclosed by a cross reference to other disclosures that provide additional information regarding such amounts. ASU No. 2013-02 is effective for fiscal years and interim periods beginning after December 15, 2012. The adoption of ASU No. 2013-02 has not had a material impact on our financial position or results of operations.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides explicit guidance on the financial statement presentation of an unrecognized tax benefit. ASU No. 2013-11 requires unrecognized tax benefits to be presented as a reduction to a deferred tax asset, except that, if a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position, then the unrecognized tax benefit should be presented as a liability. ASU No. 2013-11 has become effective for fiscal years and interim periods beginning after December 15, 2013. The adoption of ASU No. 2013-11 has not had a material impact on our financial position or results of operations.

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In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a company’s contracts with customers. ASU 2014-09 will be effective beginning the first quarter of the Company’s fiscal year 2017 and early application is not permitted. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. We are currently evaluating the effect ASU 2014-09 will have on our Consolidated Financial Statements and disclosures.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an ongoing basis. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that application of the following critical accounting policies entails the more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition

Revenue results are difficult to predict, and any shortfall in revenues or delay in recognizing revenues could cause our operating results to vary significantly from period to period and could result in future operating losses. In addition, the timing of our revenue recognition influences the timing of certain expenses, such as commissions, which could cause our expenses to fluctuate from period to period. We follow very specific and detailed guidelines in measuring revenues. However, certain judgments affect the application of our revenue policy

We generate revenues from licensing the rights to use our software products directly to end-users. We also enter into license arrangements with indirect channels such as resellers and systems integrators whereby revenues are recognized upon sale to the end user by the reseller or the system integrator

We also generate revenues from rendering professional services, including consulting, customization, implementation, training and post-contract maintenance and support.

Revenues from software product license agreements that do not involve significant customization and modification of the software product are recognized, under ASC 985-605-15. Under ASC 985-605-15, revenue from software license fees is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed and determinable, collectability is probable and vendor-specific objective evidence,or VSOE, of the fair value of undelivered elements exists. We do not grant a right of return to our customers. ASC 985-605-15 generally requires that revenues earned from software arrangements involving multiple elements that typically consist of license, professional services, and post-contract maintenance and support, be recognized under the residual method and allocated to each element. Under the residual method, revenue is recognized for the delivered elements when (1) there is VSOE of the fair values of all of the undelivered elements, (2) VSOE of fair value does not exist for one or more of the delivered elements in the arrangement, and (3) all revenue recognition criteria of ASC 985-605-15 are satisfied. Under the residual method, any discount in the arrangement is allocated to the delivered element. Our VSOE used to allocate the sales price to professional services and maintenance is based on the price charged when the undelivered elements are sold separately. For post-contract customer support, we determine the VSOE based on the renewal price charged. For other services, such as consulting and training, we determine the VSOE based on the fixed daily rate charged in stand-alone service transactions. In the event that VSOE of fair value does not exist for all undelivered elements to support the allocation of the total fee among all delivered and undelivered elements of the arrangement, revenue would be deferred until such evidence exists for the undelivered elements, or until all elements are delivered, whichever occurs earlier.

In judging the probability of collection of software license fees, we continuously monitor collection and payments from our customers and evaluate the need for a provision for estimated credit losses, based upon our historical experience and any specific customer

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collection issues that we have identified. In connection with customers with whom we have no previous experience, we may utilize independent resources to evaluate the creditworthiness of those customers. From time to time, we may perform credit evaluations of our customers. If the financial situation of any of our customers were to deteriorate, resulting in an impairment of their ability to pay amounts owed to us, additional allowances may be required.

Arrangements that include services are evaluated to determine if those services are considered essential to the functionality of the other elements of the arrangement, Services that are considered essential consist primarily of significant production, customization or modification of the software product. If services are provided, revenues under the arrangement are recognized using contract accounting in accordance with ASC 605-35-05 (“Construction-Type and Production-Type Contracts,”), using the percentage-of-completion method, based on the relationship of actual labor days incurred to total labor days estimated to be incurred over the duration of the contract. In recognizing revenues based on the percentage-of-completion method, we estimate time to completion with revisions to estimates made in the period in which the basis of such revisions becomes known.

If we do not accurately estimate the resources required or scope of work to be performed, manage our projects properly within the planned periods of time or satisfy our obligations under the contracts, then future services margins may be negatively affected, or a provision for estimated contract losses on existing contracts may need to be recognized in the period in which the loss becomes probable and can be reasonably estimated. When services are not considered essential, the revenues from the services are recognized as the services are performed.

We classify revenue as either software license revenue or services revenue. We allocate revenue to each of these items based on the VSOE established for elements in each revenue arrangement and apply the residual method in arrangements in which VSOE was established for all undelivered elements. If we are unable to establish the VSOE for all undelivered elements, we first allocate revenue to any undelivered elements for which the VSOE has been established and then allocate revenue to the undelivered element for which the VSOE has not been established, based on management’s best estimate of the fair value of those undelivered elements, and then applies the residual method to determine the license fee.

Service revenues from professional services include primarily implementation and consulting, and post-contract maintenance support and training. Implementation and consulting services revenues are generally recognized on a time and material basis or as these services are performed. Post-contract maintenance support agreements provide technical support and the right to unspecified software updates, if and when available. Revenues from post-contract maintenance support services are recognized ratably over the contractual support term, generally one year. Amounts collected from customers in excess of revenues recognized are recorded as deferred revenue.

We do not grant right-of-return to our customers. We generally provide a warranty period of three months at no extra charge. As of December 31, 2013 and 2012, the provision for warranty cost was immaterial.

Allowance for Doubtful Accounts

We evaluate the collectability of accounts receivable based on a combination of factors related to our customers. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (e.g., bankruptcy filings, substantial down-grading of credit ratings), we may record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we may recognize reserves for doubtful accounts based on the length of time the receivables are past due and on our historical experience in collecting such receivables. During 2011,2012 and 2013 no reserve for bad debts was required.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. We recorded goodwill of approximately $2.8 million related to our acquisition of iMedeon on February 25, 2002, $3.7 million related to our acquisition of Utility Partners, Inc. on July 29, 2004, and $0.6 million related to our acquisition of substantially all of the assets of e-Wise Solutions on June 15, 2005 through our Australian subsidiary ViryaNet Pty Ltd. As a result the sale of ViryaNet Pty in December 2011, the goodwill and all other assets and liabilities related to our Australian subsidiary were eliminated from our balance sheet as of December 31, 2011.

Acquisition related intangible assets result from our acquisitions of businesses. Intangible assets subject to amortization are initially recognized based on fair value allocated to them, and subsequently stated at amortized cost. Identifiable intangible assets other than goodwill are amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up in accordance with ASC 350. As of December 31, 2010, all other intangible assets (excluding goodwill) were fully amortized.

We test goodwill for impairment annually on the last day of our fourth fiscal quarter, or more frequently if certain events or certain changes in circumstances indicate they may be impaired. In assessing the recoverability of goodwill, we must make a series of assumptions about such things as the estimated future cash flows and other factors to determine the fair value of these assets. There are inherent uncertainties related to these factors and management’s judgment in applying these factors.

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In September 2011, the Financial Accounting Standards Board, or FASB, issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We did not elect to adopt this accounting guidance for our Company’s goodwill impairment test for fiscal years 2011, 2012 and 2013, and continued to use the two-step process as detailed below.

Under the existing standard (when the qualitative assessment is not elected), Goodwill impairment testing is a two-step process. The first step is a comparison of the fair values of our reporting units to their respective carrying amounts. A reporting unit is the operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. We have determined that our company represents a single reporting unit, which is equivalent to the consolidated company. We believe that a step-one test performed on an enterprise value basis (equity value plus debt less cash and cash equivalents) would provide a better indication of whether a potential impairment of goodwill exists and a step-two test should be performed, than a step-one test performed on our equity carrying value basis.

Our consolidated company represents a single reporting unit, and because of that, our company’s estimated fair value is compared to its enterprise book value as a whole. If the reporting unit’s estimated fair value is equal to or greater than that reporting unit’s enterprise book value, no impairment of goodwill exists and the testing is complete at the first step. However, if the reporting unit’s enterprise book value is greater than the estimated fair value, the second step must be completed to measure the amount of impairment of goodwill, if any. The second step of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill with its carrying amount to measure the amount of impairment loss, if any. If the implied fair value of goodwill is less than the carrying value of goodwill, then impairment exists and an impairment loss is recorded for the amount of the difference.

The estimated fair value of goodwill is determined by using an income approach. The income approach estimates fair value based on the estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital that reflects current market conditions, which reflect the overall level of inherent risk of that reporting unit. The income approach also requires us to make a series of assumptions, such as discount rates, revenue projections, profit margin projections and terminal value multiples. We estimated the company’s discount rates on a blended rate of return considering both debt and equity for comparable publicly-traded companies engaged in internet software services or application software. These comparable publicly traded companies are operating in the same or similar industry as our company and have similar operating characteristics as our company. We estimated our company’s revenue projections and profit margin projections based on internal forecasts about future performance. There are inherent uncertainties related to these factors and management’s judgment in applying these factors.

The estimated fair value of the income approach is compared to a market approach for reasonableness. The market approach estimates fair value by applying sales, earnings and cash flow multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly-traded companies with similar operating and investment characteristics to our company’s reporting unit. The market approach requires us to make a series of assumptions, such as selecting comparable companies and comparable transactions and transaction premiums.

The estimated fair value of our company as a reporting unit as of December 31, 2013 was substantially in excess of its enterprise book value. Therefore, no impairment of goodwill was recorded.

Long-lived Assets other than Goodwill

We are required to assess the impairment of long-lived assets (other than goodwill), tangible and intangible, under ASC 360-10 (“Accounting for the Impairment or Disposal of Long-Lived Assets,”) on a periodic basis, when events or changes in circumstances indicate that the carrying value thereof may not be recoverable. Recoverability of property and equipment and other intangible assets is measured by comparing the projected undiscounted net cash flows associated with those assets to their carrying values. If an asset is considered impaired, it is written down to fair value, which is determined based on the asset’s projected discounted cash flows or appraised value depending on the nature of the asset. The determination of the value of such intangible assets requires management to make assumptions regarding estimated future cash flows and other factors to determine the fair value of such assets. If these estimates or the related assumptions change in the future, we could be required to record impairment charges. We have reviewed our long lived assets and determined that the unamortized portion of our long-lived assets, other than goodwill, of approximately $48,000, is not subject to an impairment charge as of year-end 2013. All other intangible assets (excluding goodwill) were fully amortized as of December 31, 2010.

Contingencies

From time to time, we are defendant or plaintiff in various legal actions, which arise in the normal course of business. We are required to assess the likelihood of any adverse judgments or outcomes in these matters as well as potential ranges of probable losses. A

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determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is made after careful and considered analysis of each individual action together with our legal advisors. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. A change in the required reserves would affect our earnings in the period during which the change is made.

Equity-Based Compensation Expense

We account for equity-based compensation in accordance with ASC 718-10 (“Share-Based Payment.”). Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Determining the fair value of stock-based awards at the grant date requires the exercise of judgment, including the amount of stock-based awards that are expected to be forfeited. If actual results differ from these estimates, equity-based compensation expense and our results of operations could be impacted.

We did not grant any stock options during 2011, 2012 or 2013. During 2011 and 2013, we granted restricted shares to employees, directors and consultants and we did not grant any restricted shares during 2012. All restricted shares were granted for no consideration. In accordance with ASC 718-10, restricted shares are measured at their fair value as if they were vested and issued on the grant date; therefore, their fair value was equal to the share price at the date of grant. We recognize compensation expenses for the value of the awards granted based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures.

We selected the Black-Scholes option pricing model as the most appropriate fair value method for its stock options awards and value restricted stock based on the market value of the underlying shares at the date of grant. Since all restricted shares granted to employees in 2011 and 2013 were granted for no consideration, their fair value was equal to the share price at the date of grant.

Accounting for Income Tax

We account for income taxes in accordance with ASC 740, using the liability method whereby deferred tax assets and liabilities account balances are determined based on the differences between financial reporting and the tax basis for assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Our company and our subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.

The recoverability of deferred tax assets ultimately depends on the existence of sufficient taxable income of an appropriate character and we record a valuation allowance to reduce the deferred tax assets to an amount that is more likely than not to be recoverable. A change in our ability to continue to generate future taxable income could affect our ability to recover the deferred tax assets and requires re-assessment of the valuation allowance. Such changes, if significant, could have a material impact on our effective tax rate, results of operations and cash flows.

ASC 740 contains a two-step approach to recognizing and measuring a liability for uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.

As for other significant accounting policies, see Note 2 to our financial statements.

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Operating Results

The following table sets forth statements of operations data for each of the three years in the three-year period ended December 31, 2013 (in thousands):

	Year ended December 31,
	2013			2012			2011
REVENUES:
Software licenses	$	1,679		$	1,154		$	1,549
Maintenance and services		9,935			9,559			8,122
Total revenues		11,614			10,713			9,671
COST OF REVENUES:
Software licenses		79			122			56
Maintenance and services		3,879			4,101			3,513
Total cost of revenues		3,958			4,223			3,569
GROSS PROFIT		7,656			6,490			6,102
OPERATING EXPENSES:
Research and development		1,586			1,100			1,614
Selling and marketing		2,747			2,650			2,847
General and administrative		1,729			1,606			1,708
Total operating expenses		6,062			5,356			6,169
OPERATING INCOME (LOSS)		1,594			1,134			(67	)
OTHER INCOME (EXPENSE)
Financial expenses, net		(289	)		(196	)		(129	)
Gain on Forgiveness of debt		210			—			—
TOTAL OTHER EXPENSE, NET		(79	)		(196	)		(129	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		1,515			938			(196	)
TAXES ON INCOME		32			27			9
INCOME (LOSS) FROM CONTINUING OPERATIONS	$	1,483		$	911		$	(205	)
DISCONTINUED OPERATIONS:
Loss from discontinued operation net of income tax of $0		—			—			(136	)
Gain on disposal of discontinued operations net of income taxes of $0		—			—			122
NET LOSS FROM DISCONTINUED OPERATIONS		—			—			(14	)
NET INCOME (LOSS)	$	1,483		$	911		$	(219	)

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The following table describes, for the periods indicated, the percentage of consolidated statements of operations:

	Year ended December 31,
	2013			2012			2011
REVENUES:
Software licenses		14.5	%		10.8	%		16.0	%
Maintenance and services		85.5			89.2			84.0
Total revenues		100.0			100.0			100.0
COST OF REVENUES:
Software licenses		0.7			1.1			0.6
Maintenance and services		33.4			38.3			36.3
Total cost of revenues		34.1			39.4			36.9
GROSS PROFIT		65.9			60.6			63.1
OPERATING EXPENSES:
Research and development		13.6			10.3			16.7
Selling and marketing		23.7			24.7			29.4
General and administrative		14.9			15.0			17.7
Total operating expenses		52.2			50.0			63.8
OPERATING INCOME (LOSS)		13.7			10.6			(0.7	)
OTHER INCOME (EXPENSE)
Financial expenses, net		(2.5	)		(1.8	)		(1.3	)
Gain on Forgiveness of debt		1.8			—			—
TOTAL OTHER EXPENSE, NET		(0.7	)		(1.8	)		(1.3	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		13.0			8.8			(2.0	)
TAXES ON INCOME		0.2			0.3			0.0
INCOME (LOSS) FROM CONTINUING OPERATIONS		12.8			8.5			(2.1	)
DISCONTINUED OPERATIONS:
Loss from discontinued operation net of income tax		—			—			(1.4	)
Gain on disposal of discontinued operations net of income taxes		—			—			1.3
NET LOSS FROM DISCONTINUED OPERATIONS		—			—			(0.1	)
NET INCOME (LOSS)		12.8	%		8.5	%		(2.2	)%

Geographic Distribution

Tabular information concerning the distribution of our revenues according to region, stated as a percentage of our total revenues, for each of the three years in the three year period ended December 31, 2013, is set forth in “Item 4. Information on the Company— Markets” above.

Comparison of Fiscal Years Ended December 31, 2013 and 2012

Revenues

Our total revenues increased by approximately $0.9 million or 8.4%, from $10.7 million in 2012 to $11.6 million in 2013. The increase in revenues was attributable to a growth of $0.5 million in license revenues, from $1.2 million in 2012 to $1.7 million in 2013 and to an increase in revenues from maintenance and services by approximately $0.3 million, from $9.6 million in 2012 to $9.9 million in 2013. From a geographic perspective, our revenues in North America and Asia-Pacific increased in 2013 by $0.6 million and $0.3 million, respectively, compared to 2012, constituting $9.7 and $0.6 million of revenues in 2013, respectively. Our revenues from the European region remained steady from 2012 to 2013, constituting $1.0 million in each such year. In 2012 we began selling our software and services to customers in South America, a new region for ViryaNet, and the revenues from this region accounted for $0.4 million in both 2013 and 2012. From a channels perspective, the contribution of revenues from indirect sales decreased, from 31% of revenues in 2012, to 26% of revenues in 2013, whereas direct sales contribution increased from 69% of revenues in 2012 to

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74% of revenues in 2013. Direct sales increased by $1.2 million, while indirect sales decreased by $0.3 million in 2013, in each case, compared to the prior year. The significant increase in direct sales was a result of both repeat sales to existing customers and sales to new customers.

Software License Revenues

As alluded to above, software license revenues increased by $0.5 million in 2013 compared to 2012 resulting from higher average deals volumes.

As a percentage of total revenues, software licenses constituted 14.5% of total revenues in 2013, an increase over 10.8% of revenues in 2012. There were no rate changes in our license fees that had a material impact on our license revenues.

Maintenance and Services Revenues

As alluded to above, our maintenance and services revenues increased by 3.9% in 2013, due mainly to higher number of large implementation projects conducted in North America in 2013 as compared to 2012.

As a percentage of total revenues, maintenance and services constituted 85.5% of total revenues in 2013, which was lower than the 89.2% of total revenues in 2012, due to the increase in license revenues as a percentage of our revenues and in absolute value. There were no rate changes to our maintenance and services fees that had a material impact on our revenues.

Cost of Revenues

Total cost of revenues fell by 6.3%, from $4.2 million in 2012 to $4.0 million in 2013, based on the combined impact of changes in cost of software licenses and cost of maintenance and services, as further explained below.

Cost of Software Licenses

The cost of software license revenues decreased in 2013 by $43,000 compared to 2012, due to lower third party software cost, and as a result, the cost of software license revenues as a percentage of software license revenues decreased from 10.6% in 2012 to 4.7% in 2013.

Cost of Maintenance and Services

The cost of maintenance and services revenues decreased from 2012 to 2013, by 5.4%, or $0.2 million, primarily as a result of our reallocation of personnel to our research and development department in order to accelerate the development of new offerings requested by current and prospective customers, which reduced the cost of our maintenance and services revenues by $0.4 million. This reduction was offset, in part, by a $0.1 million increase in costs resulting from the appreciation of the NIS against the U.S. dollar in 2013 and an increase in the utilization of contractors, which cost an additional $0.1 million. Maintenance and services revenue costs as a percentage of maintenance and services revenues was reduced from 42.9% in 2012 to 39.0% in 2013.

Operating Expenses

Research and Development Expenses

Our net research and development, or R&D, expenses increased by $0.5 million in 2013, from $1.1 million in 2012 to $1.6 million in 2013. The increase in 2013 was due mostly to our reallocation of research and development personnel from services departments, in order to accelerate the development of new offerings requested by current and prospective customers as alluded to above, as well as new hiring in our R&D department. Our net research and development expenses increased as a percentage of revenues, from 10.3% of revenues in 2012 to 13.6% in 2013.

We expect that we will continue to devote a significant portion of our resources to research and development, in order to enhance our existing products, add enhancements to improve the quality and configurability of our software, and develop new features and functionality that will benefit all of our customers.

Sales and Marketing Expenses

Our sales and marketing expenses increased moderately by $0.1 million, from $2.6 million in 2012 to $2.7 million in 2013, constituting 23.7% of revenues in 2013, compared to 24.7% of revenues in 2012. The change was attributable mainly to an increase marketing programs and sales commissions.

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General and Administrative Expenses

Our general and administrative expenses were $1.7 million, or 14.9% of revenues, in 2013, compared to $1.6 million, or 15.0% of revenues, in 2012, a moderate increase of $0.1 million due to an increase in severance accruals in Israel in 2013, as compared to 2012.

Financial Expenses, net

Financial expenses, net, increased from $0.2 million in 2012 to $0.3 million in 2013. This increase was primarily attributable to the appreciation of the NIS relative to the U.S. dollar in 2013 (as measured by the decrease in the representative exchange rate from the end of 2012 (NIS 3.733 per one dollar) to the end of 2013 (NIS 3.471 per one dollar)), as compared to the lesser appreciation of the NIS relative to the U.S. dollar in 2012 (as measured by the decrease in the representative exchange rate from the end of 2011 (NIS 3.821 per one dollar) to the end of 2012 (NIS 3.733 per one dollar)),.

Comparison of Fiscal Years Ended December 31, 2011 and 2012

Revenues

Our total revenues increased by approximately $1.0 million or 10.8% from $9.7 million in 2011 to $10.7 million in 2012. The increase in revenues is attributable to a growth in revenues from maintenance and services by approximately $1.4 million, from $8.1 million to $9.6 million, offset in part by a decrease of $0.4 million in license revenues, from $1.5 million in 2011 to $1.1 million in 2012. From a geographic perspective, our revenues in North America and Europe increased each by $0.3 million in 2012 compared to 2011, constituting $9.0 and $1.0 million of revenues in 2012, respectively. Our revenues from the Asia Pacific region remained steady in 2011 and 2012, constituting $0.3 million in each such year. In 2012 we began selling our software and services to customers in South America, a new region for ViryaNet, and the revenues from this region accounted for $0.4 million in 2012. From a channels perspective, the contribution of revenue from indirect sales increased slightly, from 29% of revenues in 2011, to 31% of revenues in 2012, whereas direct sales contribution decreased marginally from 71% of revenue in 2011 to 69% of revenue in 2011. Both direct sales and indirect sales increased each by $0.5 million in 2012, in each case, compared to the prior year.

Software License Revenues

As alluded to above, software license revenues decreased by $0.4 million in 2012 compared to 2011 resulting from lower average deal volume in 2012.

As a percentage of total revenues, software licenses constituted 10.8% of total revenues in 2012, which is significantly lower than the 16% of revenues in 2011. There were no rate changes in our license fees that had a material impact on our license revenues.

Maintenance and Services Revenues

As alluded to above, our maintenance and services revenues increased by 17.7% in 2012, due mainly to large implementation projects conducted in North America in 2012.

As a percentage of total revenues, maintenance and services constituted 89.2% of total revenues in 2012, which is significantly higher than the 84% of total revenues in 2011. There were no rate changes in our maintenance and services fees that had a material impact on our revenues.

Cost of Revenues

Total cost of revenues increased by 18.3%, from $3.6 million in 2011 to $4.2 million in 2012, based on the combined impact of changes in cost of software licenses and cost of maintenance and services, as further explained below.

Cost of Software Licenses

The cost of software license revenue increased in 2012 by $66,000 compared to 2011, due to higher third party software cost, and as a result, the cost of software license revenue as a percentage of software license revenue increased from 3.6% in 2011 to 10.6% in 2012.

Cost of Maintenance and Services

The cost of maintenance and services revenue increased from 2011 to 2012, by 16.7%, or $0.6 million, primarily as a result of (i) the allocation of personnel from our research and development department to meet the increased projects’ work demand, as alluded to above, at a cost of $0.6 million and (ii) an increase of $0.1 million in third party software support cost, offset, in part, by (iii) a $0.1 million decrease in costs resulting from the strengthening of the U.S. dollar against the NIS in 2012. Maintenance and services revenue costs as a percentage of maintenance and services revenues remained at approximately the same level, at 43.3% in 2011 and 42.9% in 2012.

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Operating Expenses

Research and Development Expenses

Our net research and development, or R&D, expenses declined by $0.5 million in 2012, from $1.6 million in 2011 to $1.1 million in 2012. The decrease in 2012 was due to our allocation of research and development personnel to services departments, which reduced our R&D expense by $0.6 million, and was offset, in part, by the hiring of new R&D employees at a cost of $0.1 million. Our net research and development expenses decreased significantly as a percentage of revenues, from 16.7% of revenues in 2011 to 10.3% in 2012.

Sales and Marketing Expenses

Our sales and marketing expenses decreased by $0.2 million, from $2.8 million in 2011 to $2.6 million in 2012, constituting 24.7% of revenues in 2012, compared to 29.4% of revenues in 2011. The decrease was attributable mainly to a reduction in sales salary costs due to turnover of headcount.

General and Administrative Expenses

Our general and administrative expenses were $1.6 million, or 15.0% of revenues, in 2012, compared to $1.7 million, or 17.7% of revenues, in 2011, a moderate decrease of $0.1 million due to a reduction in severance accruals in Israel in 2012.

Financial Expenses, net

Financial expenses, net, increased from $0.13 million in 2011 to $0.2 million in 2012. This increase was primarily attributable to the appreciation of the NIS relative to the U.S. dollar in 2012 (as measured by the decrease in the representative exchange rate from the end of 2011 (NIS 3.821 per one dollar) to the end of 2012 (NIS 3.733 per one dollar)), as compared to the depreciation of the NIS relative to the U.S. dollar in 2011 (as measured by the increase in the representative exchange rate from the end of 2010 (NIS 3.549 per one dollar) to the end of 2011 (NIS 3.821 per one dollar)). The increase in financial expense in 2012 was offset, in part, by a decrease in interest expenses in 2012 compared to 2011, due to a reduction in the aggregate amount of our outstanding bank loans and convertible debt during 2012.

Discontinued Operations

As described previously, we disposed of our subsidiaries in Australia (ViryaNet Pty) and the UK (ViryaNet Europe) during 2011. We incurred in 2011 a loss of $0.14 million from discontinued operations. The sale of ViryaNet Pty and the disposal of ViryaNet Europe resulted in a gain from disposal of discontinued operations of $0.12 million in 2011. No amounts related to discontinued operations were recorded in 2012.

Income Taxes

Our effective corporate tax rate reflects a mix of the United States and Israeli statutory tax rates on our United States and Israeli income. Following the tax reform enacted in 2003, an Israeli company is subject to tax on its worldwide income. An Israeli company that is subject to Israeli taxes on the income of its non-Israeli subsidiaries will receive a credit for income taxes paid by the subsidiary in its country of residence, subject to certain conditions. Israeli taxpayers are also subject to tax on income from a controlled foreign corporation, according to which an Israeli company may become subject to Israeli taxes on certain income of a non-Israeli subsidiary, if such subsidiary’s primary source of income is passive income (such as interest, dividends, royalties, rental income, or capital gains).

For tax years 2010 and 2011, Israeli companies were subject to corporate tax on their taxable income at the rate of 25% and 24%, respectively. On December 5, 2011, the Knesset (Israel’s Parliament) passed a law that altered the tax burden (the “Tax Burden Law”), canceled the further planned gradual reduction in the corporate tax rates in Israel and increased and fixed the corporate tax rate at 25% starting in 2012. The capital gains tax rate was increased under the Tax Burden Law to 25% as well. The changes in tax rates did not have an effect on the Company’s tax position due to significant accumulated losses for income tax purposes, for which a full valuation has been provided.

In 2011, 2012 and 2013, the main reconciling item of the statutory tax rate (24% in 2011, 25% in 2012 and 2013) to the effective tax rate for our company ((4.59%) in 2011, 3% in 2012 and 2.1% in 2013) was tax loss carryforwards and other deferred tax assets for which a full valuation allowance was provided.

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As of December 31, 2013, we had net operating loss carry forwards for tax reporting purposes of approximately $61.8 million in the United States which can be carried forward and offset against taxable income for 20 years, expiring between 2018 and 2032, and $36.9 million in Israel which may be carried forward and offset against taxable income and capital gain in the future for an indefinite period. In the United States, the Internal Revenue Code limits the use in any future period of net operating loss carry forwards following a significant change in ownership interests.

As of December 31, 2013, we have provided full valuation allowances in respect of deferred tax assets resulting from tax loss carryforward and other temporary differences, due to the history of our operating losses since its founding through 2008 and in 2011, which raises uncertainty concerning our ability to realize these deferred tax assets in the future. We believe that it is more likely than not that the deferred tax assets relating to the loss carryforward will not be realized in the foreseeable future and a valuation allowance has been established for the full amount of the tax benefits.

Liquidity and Capital Resources

How We Have Financed Our Business

On September 19, 2000, we completed our initial public offering, or IPO. In that offering, we raised gross proceeds of $32.0 million and issued 80,000 Ordinary Shares at an effective price of $400.00 per Ordinary Share (as adjusted to reflect our one-for-ten reverse share split in May 2002 and our one-for-five reverse share split in January 2007). Since the time of our IPO, we have financed our operations primarily through additional sales of our Ordinary Shares through private placements or incurrence of convertible debt, bank related financings and sale of receivables. Historically, cash flow from operations has not always been sufficient to fund operations without the use of these additional financing measures.

Sources of Cash

Equity or Convertible Debt Financings

Financing from Lewis Opportunity Fund Group

During 2007 and 2008, we raised approximately $1.2 million of cash, excluding transaction related expenses, in a financing transaction involving our sale of Ordinary Shares, convertible notes and warrants. The transaction consisted of the following:

On December 19, 2007, we completed a private placement to a group of new financial investors, to whom we refer as the Lewis Opportunity Fund Group, that involved our issuance of (i) 363,636 Ordinary Shares at a price of $1.65 per Ordinary Share, for aggregate consideration of $600,000, (ii) a non-interest bearing convertible note in an amount of $600,000 with a conversion price of $1.65 per Ordinary Share, and (iv) warrants to purchase an aggregate of 600,000 Ordinary Shares at an exercise price of $2.00 per Ordinary Share. The warrants expired in December 2010.

On March 11, 2014 the convertible note of $600,000 principal amount that was convertible at the holder’s discretion into 363,636 Ordinary Shares at a conversion price of $1.65 per Ordinary Share, was converted into 363,636 Ordinary shares, in accordance with the terms of a related convertible note agreement.

Financing from Jerusalem Technology Investments Ltd.

On June 30, 2011, we entered into a share purchase agreement, or SPA, with Jerusalem Technology Investments Ltd., or the Investor, a company with which two of our directors—Samuel HaCohen and Vladimir Morgenstern— and one of our major shareholders (Jerusalem High-tech Founders, Ltd.) are affiliated. Pursuant to the agreement, the Investor committed to invest $250,000 in our company for 250,000 of our Ordinary Shares, reflecting a price of $1.00 per Ordinary Share, within 31 days from the date of the agreement. The Investor has made a total investment of $125,000 under the share purchase agreement ($50,000 in June 2011 and $75,000 in February 2012). On December 17, 2012 we and the Investor reached an agreement according to which the parties agreed to terminate the share purchase agreement by mutual consent such that no further investment will be made under the SPA by the Investor, and both we and the Investor released each other from any claims related to the SPA (for further details see “Item 7 Major Shareholders and Related Party Transactions”).

Financing from LibertyView

We have also obtained convertible debt financing from LibertyView Special Opportunities Fund, L.P., or LibertyView, in August 2005, for which we had an outstanding face-amount obligation of $480,000 that was due in full in August 2013. The debt bore interest at an annual rate of 7.5%, payable quarterly, and was convertible to Ordinary Shares at the discretion of LibertyView at any time during the term of the loan at a price of $11.025 per Ordinary Share.

On July 18, 2012 we and LibertyView agreed to modify the convertible debt agreement such that the Company would pay $270,000 of the original debt of $480,000 that was due in August 2013, in 12 equal monthly installments starting in July 2012. According to the agreement, the modified amount of $270,000 would not bear interest and LibertyView could convert the balance of the original debt at

36

any time into the Company’s Ordinary Shares at the original conversion price, prior to the last payment in June 2013. Once we were to pay all installments, the remaining outstanding balance of the original debt of $480,000, less any amount converted by LibertyView to Ordinary Shares prior to June 2013, was to be automatically forgiven and was to cease to be outstanding, and the entirety of the original debt was to be considered indefeasibly paid for all intents and purposes. As part of the modified agreement we granted the holder a warrant to purchase 60,000 Ordinary Shares of the Company at an exercise price of $0.80 per share, to which we refer as the Warrant, which the holder is permitted to exercise in whole or in part no later than July 2015.

Because we met all of the payment conditions and LibertyView did not convert any portion of the balance of the original debt to Ordinary Shares prior to payment of the last installment, which occurred in June 2013, the remaining outstanding principal balance of $210,000 was forgiven. Furthermore, in June 2013 we repurchased the Warrant from LibertyView for $6,000.

Bank Financings

Another important source of our cash has been our financing arrangement with Bank Hapoalim, which we initially entered into in 1999.

On September 29, 2008, Bank Hapoalim agreed to convert a $1.6 million short term loan that was due under the financing arrangement on January 2, 2009, into a long-term loan payable in the following increments: $0.1 million on July 2, 2009; an additional $0.1 million on August 15, 2009; and the balance of $1.4 million in 14 quarterly installments of $0.1 million each starting October 2, 2009. Interest on the loan was paid quarterly at a rate of 3 months LIBOR plus 3.25%. In connection with related waivers granted to us by the bank on September 28, 2008 (as described below) and the conversion of the short-term loan to a long-term loan, we paid fees of $30,000 to the bank.

On May 20, 2010, Bank Hapoalim agreed to convert a $0.25 million short term line of credit due under our financing arrangement into a long-term loan payable in ten equal quarterly payments starting September 2, 2010. Interest on the loan was paid quarterly at a rate of 3 months LIBOR plus 4.3%.

On December 18, 2011 Bank Hapoalim agreed to convert a short term credit in the amount of $0.36 million and a long-term loan balance in the amount of $0.1 million to a long-term loan in the total amount of $0.46 million, payable in 11 monthly payments starting February 6, 2013. The interest was payable monthly starting January 6, 2012 at a rate of a one month LIBOR plus 5.7%.

During 2013 we repaid Bank Hapoalim all outstanding long-term loans, and as of December 31, 2013, there were no outstanding loans, other than a short-term bank debt in an outstanding amount of amount of NIS 491 thousands.

The bank debts are secured in favor of the bank by a floating charge on all of our assets and by a personal guarantee of Samuel HaCohen, the Chairman of our board of directors.

Until the first quarter of 2013, our bank financing arrangement with Bank Hapoalim required us to adhere to certain financial covenants. On August 29, 2007, Bank Hapoalim had agreed to modify such covenant requirements as part of our overall financing arrangement such that on a quarterly basis starting August 1, 2007, (i) our shareholders’ equity was to be at least the higher of (a) 13% of our total assets, or (b) $1.5 million, and (ii) our cash balance was not to be less than $0.5 million. Bank Hapoalim provided us with a waiver of these modified covenant requirements for all periods from 2007 through the first quarter of 2013, for which we paid in previous years aggregate fees of approximately $62,500 and issued 10,000 Ordinary Shares to the bank.

On January 20, 2013 Bank Hapoalim agreed to perpetually cancel the bank covenants, and, starting from the first quarter of 2013, the covenants are no longer in effect. In connection with the cancellation of these covenants, we paid fees of $5,000 to the Bank.

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We are in the process of closing a line of credit of approximately NIS 2.6 million with Mercantile Discount Bank to replace our credit lines with Bank Hapoalim and Bank Leumi. We expect that the credit line will be apportioned as follows, subject to the delivery of final, signed documentation: 1.3 million will serve as revolving credit lines, in the aggregate, consisting of NIS 1.1 million denominated in U.S. dollars and NIS 0.2 million denominated in shekels; NIS 1 million will serve as an additional credit against our invoices; and NIS 0.3 million will serve as a guarantee to our Israeli landlord. The overall line of credit will be secured by: (i) a personal guarantee of Samuel HaCohen, our Chairman of the Board of Directors and a guarantee of Jerusalem Hitech Founders Ltd,; (ii) a restricted deposit of NIS 1.0 million; and (iii) a floating charge on all of our assets, which will replace the existing floating charge in favor of Bank Hapoalim. Our bank covenants, as part of our overall financing arrangement with the bank, require that on an annual basis our shareholders’ equity shall be at least the greater of (a) 20% of our total assets, and (b) $2.2 million. In addition, we have agreed to pay to Mercantile Discount Bank a fee equal to 150,000 times the amount by which our closing share price exceeds $3.30 per share. as of any day within the ten trading days preceding a day chosen by the bank within three years following June 12, 2014, subject to a $150,000 maximum fee. The bank’s right to payment of this fee terminates upon the occurrence of a merger involving, or an acquisition of, our company.

Government Guaranteed Bank Financing

A new source of cash that we began to draw upon in recent years is a government-guaranteed business loan. On June 28, 2011 we received an approval from the State Guaranteed Medium Business Assistance Fund, or the Fund, for a loan in the amount of NIS 2,100,000 (approximately $606,411, based on the exchange rate of NIS 3.463: US$1 reported by the Bank of Israel on June 28, 2011), guaranteed by the Israeli government. The disbursement of the loan to us was contingent upon our securing an equity investment of at least NIS 500,000. The required equity investment may be executed in one of two manners: (i) a restricted shareholders’ loan payable after five years, or (ii) an equity investment in which the investors receive our shares.

On July 7, 2011, following our receipt of NIS 170,000, or $50,000, via an equity investment by Jerusalem Technology Investments pursuant to the share purchase agreement dated June 30, 2011 (as described in Item 7 below— under “Related Party Transactions—Equity Financing”), thereby meeting, in part, the condition for disbursement of the loan, we received part of the total amount approved to us under the loan— NIS 750,000— from the Fund’s participating bank, Bank Otsar Ha-Hayal. The loan bears annual interest at the rate of the Israeli prime rate, plus 3.5% (equal to 8.57% as of the time of the initial loan disbursement), and the principal is to be repaid in 49 equal monthly payments of NIS 18,080 each (which includes interest as well), beginning on August 6, 2012. Interest is payable on a monthly basis beginning on August 6, 2011.

The balance of the loan, or NIS 1,350,000, was disbursed to us on September 6, 2011. The loan bears annual interest at the rate of the Israeli prime rate, plus 3.5%, payable monthly starting October 7, 2011 and the principal is payable in 49 equal monthly payments of NIS 32,545 each (which includes the interest as well), beginning on September 8, 2012. Since we did not receive the equity investment balance of NIS 330,000 as of the date of the disbursement of the loan balance (that is, September 6, 2011), as required under the loan terms set by the Fund, Bank Otsar Ha-Hayal instead restricted our access to an amount of $140,000 in cash from the loan proceeds, as a means to secure the repayment of the loan.

The loan is guaranteed by the Israeli government, based on an approval from Israel’s State Guaranteed Medium Business Assistance Fund, and by a personal guarantee of Samuel HaCohen, our Chairman of the board of directors.

On October 17, 2012 we received an approval from the Fund for an additional loan in an amount of NIS 1,000,000, guaranteed by the Israeli government, and on October 24, 2012 we received the first installment of NIS 500,000 of the approved amount. The repayment of the loan is secured by a restriction on our access to NIS 90,000 of the loan proceeds, and by a personal guarantee of Samuel HaCohen, our Chairman of the board of directors. The loan bears annual interest at the Israeli prime rate, plus 3.5% (equal to 7.25% as of the time of loan disbursement), and the principal and interest are payable in 60 equal monthly payments of NIS 9,960 each (which includes interest as well), beginning on November 29, 2012.

On January 13, 2013 we received the second installment of the approved loan, in an amount of NIS 500,000, from Bank Otsar Ha-Hayal. The repayment of the loan is secured by a restriction on our access to an additional NIS 145,000 of the loan proceeds, and by a personal guarantee of Samuel HaCohen, our Chairman of the board of directors.

The loan bears annual interest at the Israeli prime rate, plus 3.5% (equal to 6.75% as of the time of loan disbursement), and the principal and interest are payable in 60 equal monthly payments of NIS 9,842 each (which includes interest as well), beginning on February 14, 2013.

As of March 31, 2014, our aggregate outstanding borrowings from Bank Otsar Ha-Hayal under Fund-guaranteed loans were approximately $0.6 million.

For a description of the risks related to our bank financings, please the “Risks Related to our Business and Financing Needs” in the “Risk Factors” section of Item 3 of this annual report.

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Sale of Receivables

From time to time, we sell receivables to third parties under arrangements in which the third party pays us the amount of the accounts receivable, less an agreed upon commission and interest, and we fully transfer control of and risk related to, and irrevocably assign, the accounts receivable, which we sell without recourse to us. Our ability to sell such receivables in the future to these or other third parties under the same terms and conditions currently available to us is uncertain and is dependent on the creditworthiness of the customers involved, the credit risks in the specific countries concerned and the third parties’ policies from time to time.

Cash Balances

As of December 31, 2013, we had cash and cash equivalents of $0.92 million, compared to $0.34 million as of December 31, 2012. The increase in our cash and cash equivalents balance in 2013 was due, in summary, to $1.18 million of net cash provided by operating activities, offset, in part, by $0.63 million of net cash used in financing activities.

Operating Activities

In 2013, the net cash provided by operating activities of $1.18 million, reflected primarily our net income of $1.48 million, adjusted to account for changes in operating assets and liabilities, including mainly (i) an increase of $0.8 million in trade receivables, offset by (ii) an increase of $0.4 million in deferred revenue and also adjusted to account for income and expense items not involving cash flows such as $0.2 million of gain from forgiveness of debt.

In 2012, the net cash provided by operating activities of $0.51 million, reflected primarily our net income of $0.9 million, adjusted to account for changes in operating assets and liabilities, including (i) a decrease of $0.6 million in other accounts payable, (ii) a decrease of $0.4 million in trade payables, offset by (iii) an increase of $0.2 million in trade receivables and (iv) an increase of $0.4 million in deferred revenue. The net impact of income and expense items not involving cash flows was immaterial.

In 2011, net cash provided by operating activities was $0.13 million, reflecting primarily our net loss of $0.2 million, while eliminating $0.1 million gain from disposal of subsidiaries, and adjusted to account for non-cash items, including (i) an increase of $0.6 million in other accounts payable, (ii) an increase of $0.3 million in trade payables, (iii) a decrease of $0.2 million in trade and other receivables and (iv) a decrease of $0.9 million in deferred revenue, while also reflecting the following additional adjustments for non-cash items: (x) depreciation and amortization of $0.1 million, and (y) stock based compensation of $0.1.

Investing Activities

In 2013 investing activities provided $38,000 of net cash, which resulted from our collection of a long-term receivable. In 2012, investing activities provided $113,000 of net cash, resulting from our collection of a substantial long-term receivable. In 2011, investing activities used $275,000 of net cash, reflecting cash used for our purchase of property and equipment, and furthermore reflecting our being owed a new long-term receivable.

Financing Activities

Financing activities used $0.6 million of net cash in 2013, primarily attributable to $0.8 million of cash used for repayment of long-term loans and convertible debt, offset in part, by new bank loans of $0.1 million.

Financing activities used $0.4 million of net cash in 2012, primarily attributable to $0.6 million of cash used for repayment of long-term loans and convertible debt, offset in part, by receiving new bank loans of $0.1 million and an equity investment of $0.1 million.

Financing activities provided $0.2 million of net cash in 2011, which included $0.6 million of cash proceeds provided by new bank loans, $0.2 million of cash proceeds from a short-term bank credit and $0.1 million of cash from an equity investment in our company, offset in part by $0.5 million of cash used for our repayment of long-term bank loans and $0.1 million of restricted cash.

Future Cash Needs

In addition to our need to continue to meet our payment obligations to Bank Otsar Ha-Hayal under the terms of our debt arrangements, our capital requirements will depend on numerous factors, including market demand for, and acceptance of, our products, the resources we devote to developing, marketing, selling and supporting our products, and the timing and extent of establishing additional international operations. We intend to continue investing significant resources in our selling and marketing, and research and development operations in the future. We continually evaluate our operating cash flows which can vary subject to the actual timing of expected new sales compared to our expectations of those sales and are sensitive to many factors, including changes in working capital and profitability. We have projected revenues for 2014 which we believe will provide sufficient funds to sustain our continuing operations. However, projections of future cash needs are subject to substantial uncertainty.

We believe that our cash and cash equivalents and cash generated from operations will be sufficient to meet our currently anticipated cash requirements for at least until the end of 2014. Our ability to achieve profitability and satisfy our liquidity needs using our currently available cash, cash equivalents and cash generated from operations will depend on our ability to increase our revenues,

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while continuing to control our expenses. We cannot assure you that we will be able to achieve the necessary revenue growth and sustain profitability, particularly given the risk factors outlined earlier in this annual report on Form 20-F. If we are not successful doing so, we may be required to seek new sources of financing or additional funds from existing financing sources, such as the government-guaranteed loan described above. If additional funds are raised through issuance of equity or debt securities, these securities could have rights, preferences and privileges senior to those of holders of Ordinary Shares, and the terms of these securities could impose restrictions on our operations, and will result in additional dilution to our shareholders. Our ability to raise additional secured debt may require the consent of Bank Hapoalim and Bank Otsar Ha-Hayal, or Mercantile Discount Bank. The limited volume of trading in our Ordinary Shares on the OTCQB could significantly impair our ability to raise capital should we desire to do so in the future, as it may materially impair the market price and trading market for the Ordinary Shares received by investors in a financing transaction.

Research and Development, Patents and Licenses, etc.

We believe that our future success depends, on our ability to maintain and extend our technological leadership through our research and development activities. We employ product managers in our research and development activities. These managers provide a critical interface between our research engineers and customer needs and industry developments. This interface helps focus our research and development personnel on developing market-driven applications. By using information provided by our product managers, we can also manage our research and development resources to address perceived market trends.

Our research and development net expenditures for 2013, 2012 and 2011 were $1.6 million and $1.1 million and $1.6 million, respectively (see the risk factor titled “We may need to further expand our sales, marketing, research and development and professional services organizations but may lack the resources to attract, train and retain qualified personnel, which may hinder our ability to grow and meet customer demands” in Item 3 above).

Research and Development Grants from the OCS

We conduct our research and development activities primarily at our principal offices in Israel. Our research and development efforts have been financed in the past, in small part, through grants from the OCS pursuant to the Research and Development Law, or the Research Law. Under these grants, royalties are payable to the OCS at the rate of 3% to 5% of revenues derived from products developed by us under those programs. The aggregate amount of royalties we could be obligated to pay would be up to 100% to 150% of the amount of grants received, with annual interest accruing at the rate of LIBOR from the time of the grant.

The State of Israel does not own proprietary rights in technology developed with OCS funding and there is no restriction on the export of products manufactured using technology developed with OCS funding. The technology is, however, subject to certain transfer restrictions. These restrictions may impair our ability to sell our technology assets or to outsource manufacturing, and the restrictions continue to apply even after we have paid the full amount of royalties, payable for the grants. The transfer of our know-how that we developed with OCS funding is subject to OCS approval and, further, would require us to pay a so-called “redemption fee” to the OCS. Section 19B of the Research Law sets forth two alternatives for calculating the fees payable to the OCS in the event of an overseas transfer of know-how – one for the transfer of know-how alone, and one for the transfer of know-how as part of a sale of our assets or a merger. In either case, the fee is a function of the proceeds from the sale, the amount of OCS grants and the amounts invested by our company with our own funds and subject to certain amortization based on the age of the grant. These transfer restrictions and redemption fee may impair our ability to consummate a merger or similar transaction in which the surviving entity is not an Israeli company.

During 2001, 2002 and 2003, we received grants from the OCS in an aggregate amount of $372,000. During 2013, 2012 and 2011 we made royalty payments of $4,200, $4,200 and $2,800, respectively, to the OCS in respect of these grants. As of December 31, 2013, we have an outstanding contingent liability to pay royalties in the amount of approximately $404,000, including interest, to the OCS.

Trend Information

Trends in Our Industry

We operate in the field service management, or FSM, market. Application providers in this space help service organizations to manage the full lifecycle of installation, maintenance and repair of assets and streamline the work process in the field.

Service businesses comprise over 70% of the world economy and are continuing to grow. FSM continues to emerge as a key service delivery enabler and as a marketplace differentiator. For example: FSM enables utilities to fulfill the smart grid vision; and FSM enables differentiation and continuous improvement in competitive markets such as telecommunications and healthcare.

The FSM market is characterized as fragmented. Vendors vary significantly in size (from small companies to giants like SAP and Oracle) and focus (from mobility to optimization to end-to-end process and/or vertical focus) and are typically competing for the same deals.

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The field service management market is affected by the availability of new technologies in the areas of social, mobile, cloud and information. Application vendors that will embrace those changes in a more effective way are likely to create differentiation in this market.

Trends Impacting, or Reflected in, Our Results of Operations

Revenues and Gross Margin. Our results of operations related to revenues may be subject to significant fluctuations due to several factors, primarily the timing of large orders, which represent a significant percentage of our revenues, customer budget cycles, which impact our customers’ timing for buying decisions, competitive pressures, the ability of our partners to become effective in selling and marketing our products, and other factors.

During 2013, our total revenues increased by 8.4% compared to 2012. This increase was attributable to a growth of 45.5% in our software license revenues, from $1.2 million in 2012 to $1.7 million in 2013, and also to a lesser extent, by an increase of 3.9% in our maintenance and services revenues, from $9.6 million in 2012 to $9.9 million in 2013. The growth of license revenues, which resulted from an increase in the average volume per deal, contributed significantly to our overall gross margins, since license revenues are characterized by higher margins than maintenance and services revenues.

During 2012, our total revenues increased by 10.8% compared to 2011. This increase was attributable to a growth of 17.7% in our maintenance and services revenues, from $8.1 million in 2011 to $9.6 million in 2012, offset in part, by a decrease of 25.5% in our software license revenues, from $1.5 million in 2011 to $1.2 million in 2012. The growth of our maintenance and services revenues, which was a good indicator of existing and new customers’ continuous interest in additional services projects, did not add favorably to our overall gross margins, due to the decrease in license revenues which produces higher margins than maintenance and services revenues.

Contrary to 2012, in 2011, our total revenues declined by 6.2% compared to 2010, while our software license revenues in 2011 remained similar to 2010, constituting $1.5 million and 16% of our total revenues. This provided an indication that despite reduction in implementation projects, there is buying interest in our products. The decline in our services revenues in 2011 was not directly related to any changes in the amount of our software license sales but was instead related to the completion of some large professional services engagements that began in 2010 and did not contribute as much revenue in 2011.

As a result of the continuation of the global economic uncertainty or, in some instances, the very slow recovery of the global economy, we have continued to experience during 2011, 2012 and 2013, its adverse impact on customers’ demand for our products and services. We anticipate that this trend may continue for so long as global macroeconomic uncertainties are prevalent.

Currency Exchange Rates. Another significant trend that we have noted that has impacted our financial results— commencing in 2008 and continuing through 2013— is an increase in the volatility of currency exchange rates, particularly the U.S. dollar—New Israeli Shekel exchange rate. As described elsewhere in this annual report, our revenues and financial results generally are reported in U.S. dollars, yet in 2013, a significant portion— approximately 27%— of our expenses were incurred in shekels. Therefore, to the extent that the shekel appreciates relative to the U.S. dollar, or, even if the shekel devaluates in relation to the U.S. dollar, if the rate of inflation in Israel exceeds such rate of devaluation or the timing of such devaluation lags behind inflation in Israel, we are subject to increased dollar costs for our operations. The recent significant fluctuations in exchange rates make it difficult for us to decipher a unidirectional trend, but the mere existence of such fluctuations increases the likelihood that our operating results may also fluctuate in an erratic fashion as a result thereof. The shekel-U.S. dollar exchange rate, which decreased from NIS 3.821 per U.S. dollar at the end of 2011 to NIS 3.733 per U.S. dollar at the end of 2012, continued to decline during 2013 to NIS 3.471 at the end of 2013, has risen slightly thus far in 2014, increasing to NIS 3.484 at the end of April 2014. Please see “Impact of Currency Fluctuation and Inflation” above in this Item 5 for further information.

Changes in the value of the U.S. dollar against non-U.S. dollar currencies can affect our revenues in U.S. dollars. In 2013, however, a small portion, or approximately 7% of our revenues were denominated in non-U.S. dollar currencies such as the Canadian Dollar and the British Pound, and therefore, the net effect of the change in value of the U.S. dollar against other currencies on our revenues was not significant.

For more information about our expectations regarding our future revenues, cost of revenues, future operating expenses and liquidity and capital resources, please see the discussion under the “Risk Factors” section of Item 3 and the “Liquidity and Capital Resources” section of this Item 5 above.

Off-balance Sheet Arrangements

Other than potential royalty payments to the OCS (which are discussed above in this Item 5 under the heading “Research and Development Grants from the OCS”), we are not party to any material off-balance sheet arrangements.

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Tabular Disclosure of Contractual Obligations

Contractual Obligations as of December 31, 2013

	Payments due by Period (US$ in thousands)
	Total		Less Than 1 Year		1 – 3 Years		3 – 5 Years		More Than 5 Years
Short-term bank debt	$	171	$	171	$	—	$	—	$	—
Long-term bank debt (1)	$	652	$	199	$	390	$	63	$	—
Operating leases (2)	$	1,019	$	443	$	576	$	—	$	—
Accrued severance pay, net (3)	$	335	$	—	$	—	$	—	$	—
Uncertain income tax position (4)	$	11	$	—	$	—	$	—	$	—
Total Contractual Obligations:	$	2,188	$	813	$	966	$	63	$	—

(1) See “Liquidity and Capital Resources-Bank Financing” for a description of our long-term bank debt and convertible debt

(2) Includes payments under non-cancelable operating lease agreements for facilities and automobiles.

(3) Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor law. These obligations are payable only upon termination, retirement or death of the relevant employee and there is no obligation if the employee voluntarily resigns. See also Note 11 of the Notes to Consolidated Financial Statements included elsewhere in this annual report for further information regarding accrued severance pay.

(4) Uncertain income tax position under ASC 740-10. ASC 740-10 relates to a situation in which income taxes are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 13 of the Notes to Consolidated Financial Statements included elsewhere in this annual report for further information regarding our liability under ASC 740-10.

Item 6. Directors, Senior Management and Employees

Directors and Senior Management

Name	Age		Position
Samuel I. HaCohen		56	Executive Chairman of the board of directors
Memy Ish-Shalom		54	President and Chief Executive Officer
Yohanan Engelhardt		56	Chief Financial Officer
Nir Diskin		48	Vice President, Engineering
Vladimir Morgenstern		56	Director
Arie Ovadia		65	Director
Nati Perry		60	Director
Austin W. Lewis IV		38	Director
Andy Ben-Artzy		68	Director

Samuel I. HaCohen co-founded ViryaNet in March 1988. Since March 1988, Mr. HaCohen has served as our chairman of the board of directors. From March 1988 until February 2001, Mr. HaCohen served as our chief executive officer and as the chairman of the board of directors. Before co-founding ViryaNet, Mr. HaCohen held senior systems management positions in John Bryce Systems Ltd., a software company, and the Hadassah Hospital, Jerusalem. Mr. HaCohen holds a Bachelor of Science degree in computer science and statistics from the Hebrew University of Jerusalem and has completed all course work for a Master of Science degree in statistics from the Hebrew University of Jerusalem.

Memy Ish-Shalom has served as our president and chief executive officer since January 2006 and had served as our chief operating officer from February 2001 until November 2002. Prior to rejoining ViryaNet, Mr. Ish-Shalom served as the chief executive officer of Wadago, Ltd., an Israeli based privately held company that has developed a product set for enabling visibility and control for file-based application integration. Prior to Wadago, Ltd., Mr. Ish-Shalom served as the chief operating officer at Waltham-based Guardium, Inc., a leader in real-time enterprise database monitoring and protection (acquired by IBM). Mr. Ish-Shalom served as vice president of customer care and billing at Amdocs from April 2000 until November 2000. During the period from May 1989 until April 2000, Mr. Ish-Shalom was employed at ViryaNet and served in a number of senior management positions, including research and development manager, general manager of Israeli operations, and executive vice president of engineering. Mr. Ish-Shalom holds a Bachelor of Science degree in computer science from the Hebrew University of Jerusalem.

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Yohanan Engelhardt was appointed as our chief financial officer in May 2012. Prior to that, beginning in 1996, Mr. Engelhardt served as our Vice President of Finance. Prior to joining ViryaNet, from 1994 to 1996, Mr. Engelhardt served as the chief financial officer of Aryt Industries, which develops, manufactures, and markets electronic products for the military market through its subsidiary Reshef Technologies. From 1990 to 1994 Mr. Engelhardt served as the chief financial officer of Keter Publishing House. Mr. Engelhardt is a Certified Public Accountant in both the United States and Israel and holds a B.A. in Accounting and Economics from the Hebrew University of Jerusalem.

Nir Diskin has served as our vice president of engineering since September 2005 and is responsible for leading ViryaNet’s diverse worldwide development team. Previously, Mr. Diskin held a number of management positions within our research and development organization and was promoted to vice president of product management in 2000. Prior to joining ViryaNet in 1996, Mr. Diskin served as a major in the Israeli Air Force where he held positions of leadership and participated in avionics software development. Mr. Diskin holds a Bachelor of Science degree in computer science from the Hebrew University in Jerusalem.

Vladimir Morgenstern co-founded the Company with Mr. HaCohen. He has served as one of the Company’s directors since July 1999. Mr. Morgenstern currently serves as a business and technology advisor to several start-up companies and is a senior architect at EMC Software. From November 1999 until October 2001, Mr. Morgenstern served as the Company’s executive vice president, corporate programs. Mr. Morgenstern served as the Company’s technical manager and chief technology officer from March 1988 until November 1999. Before co-founding ViryaNet, Mr. Morgenstern held senior systems management positions at John Bryce Systems Ltd. and the Hadassah Hospital, Jerusalem. Currently, Mr. Morgenstern is a senior architect at EMC Software. Mr. Morgenstern holds a Bachelor of Science degree in physics from Vilnius University in Lithuania and has completed all course work for a Master of Science degree in applied mathematics.

Arie Ovadia advises major Israeli companies on finance, accounting and valuations and is a member of the board of directors of several corporations, including Israel Discount Bank, Phoenix Insurance Company, Elite Industries, Israel Petrochemical Industries and Tadiran Communications. He has taught at New York University (New York, NY), Temple University (Philadelphia, PA) and, in Israel, at Tel Aviv and Bradford Universities. Dr. Ovadia serves as a member of the Israeli Accounting Board and is a 15-year member of the Israeli Security Authority. He holds an undergraduate degree and an MBA from Tel Aviv University and earned his PhD in economics from the Wharton School at the University of Pennsylvania.

Nati Perry has served as a director of ViryaNet since December 2007. Mr. Perry is the former founder and chief executive officer of Barak I.T.C., a leading ISP and telephony company based in Israel. Prior to becoming chief executive officer, Mr. Perry also served as the chief operating officer, and vice president of engineering since founding Barak I.T.C in 1997. Prior to Barak I.T.C., Mr. Perry was with the Israeli Air Force since 1984 and served as the head of several departments of the Air Force including communications, planning and logistics. Mr. Perry received his Bachelor of Science degree in electrical engineering from Ben-Gurion University of Negev, Israel in 1981, and his Master of Science degree in Teleprocessing from USM University in the United States in 1984.

Austin W. Lewis IV currently serves as the Chief Executive Officer of Lewis Asset Management Corp., an investment management company headquartered in New York City which he founded in 2004. From 2003 to 2004, Mr. Lewis was employed at Puglisi & Company, a New York based broker-dealer registered with FINRA, where he served as a registered representative and managed individual client accounts, conducted due diligence for investment banking activities and managed his own personal account. In 2002, Mr. Lewis co-founded Thompson Davis, & Company, Inc., a registered broker-dealer headquartered in Richmond, Virginia. From 1998 to 2002, Mr. Lewis was employed by Branch Cabell and Company, Inc. in Richmond, Virginia (“Branch Cabell”) where he was a registered representative. Following the November 2000 acquisition of Branch Cabell by Tucker Anthony Incorporated (“Tucker Anthony”), Mr. Lewis served as a Vice-President for Tucker Anthony and subsequently RBC Dain Rauscher, Inc. which acquired Tucker Anthony in August of 2001. Mr. Lewis received his Bachelor of Science degree in Finance and Financial Economics from James Madison University in 1998.

Andy Ben-Artzy was a member of the senior management of Swiss Re, the leading reinsurance company in the world, from 1996 to 2006. As a member of the Executive Team of the Global IT function, Andy had responsibility over Business Architecture and Strategy and Planning. Dr. Ben-Artzy had held management positions for the World Bank (1989 to 1993), Bank Leumi in Israel (1979 to 1989), Citibank in New York (1970 to 1979) and the Government of Israel (Mamram, 1964 to 1969). During his tenure at Swiss Re, Dr. Ben-Artzy was part of the team responsible for designing the IT architecture to support the new business model for the globalization of Swiss Re, i.e. its transformation from a multinational to a global company. Born in 1945, Dr. Ben Artzy studied economics and statistics at Tel Aviv University (1969) followed by an MBA and a Ph. D. in investment finance and management information systems from New York University (1978).

Arrangements or Understandings Concerning Appointment of Directors

Telvent Investments, S.L., or Telvent, the holder of 297,081 of our Ordinary Shares, possesses the right to designate a member of our board of directors. Telvent’s previous appointee, Javier Garoz Neira, resigned in 2011 and as of the date of this annual report, no director has been appointed on behalf of Telvent.

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Other than as described immediately above, there are no arrangements or understandings pursuant to which any of our directors or members of senior management were elected as such. There are furthermore no family relationships among any such directors or members of our senior management.

Compensation

The aggregate remuneration that paid or accrued to our directors and executive officers as a group in salaries, fees, commissions and bonuses with respect to the year ended December 31, 2013 was approximately $1.06 million. The aggregate amount set aside or accrued during 2013 to provide pension, retirement or similar benefits for our directors and executive officers, pursuant to any existing plan provided by and/or contributed to by us, was approximately $12,000 (which is included in that $1.06 million amount).

On November 29, 2005, our shareholders approved a revised compensation plan for our directors who are not executive officers, which became effective on January 1, 2006. The revised compensation plan includes (i) an annual fixed retainer of $3,000 for membership on each of (a) the board of directors, and (b) each committee of the board of directors, and (ii) for each of the four scheduled meetings of the board of directors and committees thereof during each calendar year, a fee of $1,000 per meeting if the member participated in such meeting in person or via phone. Participation in any additional meetings of the board of directors or its Committees does not entitle any director to additional compensation. All directors are reimbursed for their reasonable expenses incurred for each board of directors or committee meeting attended in person. With respect to our external directors, such compensation and reimbursement of expenses are made in accordance with the applicable provisions of the Companies Law. For additional information, please see the discussion below under the heading “External Directors”.

In February 2010, our shareholders authorized the audit committee and the board of directors to grant, on an annual basis (starting from 2009), up to 20,000 restricted shares to each director of the Company, subject to the available pool under the Company’s stock option plans. The actual terms of the grants, including the vesting schedule and related terms, shall be as determined by the board of directors as long as the annual grant per director does not exceed such 20,000 restricted shares.

In March 2011, we granted 75,000 restricted shares units, in the aggregate, to our directors, which were released from restrictions during 2011.

During 2012 no restricted shares or stock options were granted to any of our directors or officers.

In January and February 2013, 137,500 restricted shares units were granted to our directors and officers. Of the restricted shares units that were granted, 118,332 shares were released from restriction during 2013 and 19,168 shares are being released from restriction over a one year release period. Release of the restrictions on the restricted shares units is subject to acceleration upon certain events such as a merger or acquisition.

In December 2013, 120,000 restricted shares units were granted to our directors. The restricted shares units will be released from restriction over a three years period.

All restricted shares units that we granted in 2011 and 2013 did not require payment of consideration by the grantees thereof. In general, restrictions on some restricted shares lapse over a period between two years and three years from the date of grant and some shares are released from restriction upon grant or within the first year after the grant. All restricted shares units granted to executive officers and directors would be released from restriction upon our consummation of a merger, acquisition or similar transaction in which there is a change of control of our company.

In December 2012, an amendment to the Companies Law, or Amendment No. 20, became effective, requiring companies to appoint a compensation committee. Our existing compensation committee— as detailed in Item 6. “Board Practices Compensation Committee” below— meets this requirement.

Amendment No. 20 also requires that companies adopt a compensation policy, which will set forth company policy regarding the terms of engagement of office holders. Such compensation policy will need to be set by our board, after considering the recommendations of our compensation committee, and will require shareholder approval.

The compensation policy must serve as the basis for decisions concerning the financial terms of employment or engagement of office holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives, the company’s business and its long-term strategy, and creation of appropriate incentives for executives. It must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation policy must furthermore consider the following additional factors:

• the knowledge, skills, expertise and accomplishments of the relevant director or executive;

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• the director’s or executive’s roles and responsibilities and prior compensation agreements with him or her;

• the relationship between the terms offered and the average compensation of the other employees of the company, including those employed through manpower companies;

• the impact of disparities in salary upon work relationships in the company;

• the possibility of reducing variable compensation at the discretion of the board of directors; and the possibility of setting a limit on the exercise value of non-cash variable compensation; and

• as to severance compensation, the period of service of the director or executive, the terms of his or her compensation during such service period, the company’s performance during that period of service, the person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company.

The compensation policy must also include the following principles:

• the link between variable compensation and long-term performance and measurable criteria;

• the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation;

• the conditions under which a director or executive would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements; and

• the minimum holding or vesting period for variable, equity-based compensation.

The compensation policy must also consider appropriate incentives from a long-term perspective and maximum limits for severance compensation.

Under the Companies Law and related regulations, the compensation payable to statutory independent directors and independent directors is subject to certain further limitations. See Item 6 “Board Practices External and Independent Directors” below.

Board Practices

The following table sets forth certain information concerning our current directors and executive officers:

Name	Current Office(s) Held	Commencement of Office	Expiration/Renewal Of Current Term of Office
Samuel I. HaCohen (1)	Executive Chairman of the board of directors	March 1998	upon 6 months advance notice
Memy Ish-Shalom (1)	President and Chief Executive Officer	January 2006	upon 3 months advance notice
Yohanan Engelhardt	Chief Financial Officer	May 2012	upon 3 months advance notice
Nir Diskin	Vice President, Engineering	September 2005	upon 60 days advance notice
Vladimir Morgenstern	Director	July 1999	2014 Annual Meeting
Arie Ovadia (1)(2)(3)(4)	Director	December 2006	2015 Annual Meeting
Nati Perry (3) (4)	Director	December 2007	2014 Annual Meeting
Austin W. Lewis IV (1)	Director	February 2010	2014 Annual Meeting
Andy Ben-Artzy (1)(2)(3)(4	Director	February 2010	2014 Annual Meeting

(1) Member of strategy committee.

(2) External Director under the Companies Law

(3) Member of audit committee

(4) Member of compensation committee

Other than our employment agreement with Mr. HaCohen, we do not have any employment or service contracts with our directors that provide for benefits upon termination of employment. Mr. HaCohen’s employment agreement contains various provisions, including provisions relating to acceleration of vesting of his options and/or restricted shares upon a change in the control of our company. In addition, he is entitled to six months of severance benefits in the event that we terminate his employment without cause, under the circumstances provided in his employment agreement, or in the event that he resigns due to a demotion.

Our Articles of Association provide that directors are elected at our annual general meeting of shareholders by a vote of the holders of a majority of the voting power represented at that meeting. Each director, except for the external directors under the Companies Law as described below, holds office until the next annual general meeting of the shareholders.

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External and Unaffiliated Directors

Companies Law Requirement

We are subject to the provisions of the Companies Law. Under the Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel, are required to appoint at least two external directors. Mr. Ovadia and Mr. Ben-Artzy serve as our external directors.

Who May Be Appointed

A person may not be appointed as an external director if the person is a relative of the controlling shareholder of the company or if that person or his or her relative, partner, employer, another person to whom he or she was directly or indirectly subject, or any entity under the person’s control, has, as of the date of the person’s appointment to serve as external director, or had, during the two years preceding that date, any affiliation or one of certain other prohibited relationships with the company or any person or entity controlling (or relative of such controlling person), controlled by or under common control with the company (or, in the case of a company with no controlling shareholder, any affiliation or one of certain other prohibited relationships with a person serving as chairman of the board, chief executive officer, a substantial shareholder or the most senior office holder in the company’s finance department). The term “affiliation” and the similar types of prohibited relationships include:

• an employment relationship;

• a business or professional relationship, even if not maintained on a regular basis (but excluding a de minimis level relationship);

• control; and

• service as an office holder (as defined in the Companies Law and described below under “Exculpation, Insurance and Indemnification of Directors and Officers”).

If, at the time of election of an external director, all other directors who are not the company’s controlling persons or their relatives are of the same gender, the external director to be elected must be of the other gender.

Pursuant to the Companies Law, all external directors must have accounting and financial expertise or professional qualifications, and at least one external director must have accounting and financial expertise. A director with “accounting and financial expertise” is a director that due to his or her education, experience and skills has a high expertise and understanding in financial and accounting matters and financial statements, in such a manner which allows him to deeply understand the financial statements of the company and initiate a discussion about the presentation of financial data. A director is deemed to have “professional qualifications” if he or she either (i) has an academic degree in economics, business management, accounting, law or public service, (ii) has an academic or other degree or has completed other higher education, all in the field of business of the company or relevant for his/her position, or (iii) has at least five years experience as either a senior managing officer in the company’s line of business with a significant volume of business, a public office, or a senior position in the company’s main line of business.

We believe that both of our external directors possess both professional qualifications and accounting and financial expertise.

Conflicts of Interest

No person may serve as an external director if the person’s position or other business activities create, or may create, a conflict of interest with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. A person may furthermore not continue to serve as an external director if he or she accepts, during his or her tenure as an external director, direct or indirect compensation from the company for his or her role as a director, other than amounts prescribed under the Companies Law regulations (as described below) or indemnification, the company’s undertaking to indemnify such person, exemption and insurance coverage.

Following the termination of an external director’s service on a board of directors, such former external director and his or her spouse and children may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s control, including engagement to serve as an executive officer or director of the company or a company controlled by its controlling shareholder or employment by, or providing services to, any such company for consideration, either directly or indirectly, including through a corporation controlled by the former external director, for a period of two years (such prohibition also applies to other relatives of the former external director for a period of one year).

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How External Directors Are Elected

External directors are elected by a majority vote at a shareholders’ meeting, provided that either:

• the majority voted in favor of election includes a majority of the shares held by non-controlling shareholders who do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that are voted at the meeting (abstentions are disregarded in this calculation), or

• the total number of shares held by non-controlling, disinterested shareholders (as described in the previous bullet-point) voted against the election of the director does not exceed two percent (2%) of the aggregate voting rights in the company.

Term of Service

The initial term of an external director is three years and may be extended by the general meeting of shareholders for up to two additional three year terms, provided that his or her service for each such additional term is recommended by one or more shareholders holding at least one percent (1%) of the company’s voting rights and is approved by a majority at a shareholders meeting, which majority must include both criteria described above with respect to his or her initial election.

Committee Service; Compensation

Each committee of a company’s board of directors exercising powers delegated by the board of directors is required to include at least one external director and each of the audit committee and compensation committee must include all of the external directors.

An external director is entitled to compensation as provided in regulations promulgated under the Companies Law and is otherwise prohibited from receiving any compensation, directly or indirectly, in connection with services provided as an external director or otherwise to the company.

Qualifications of Directors Generally Under the Companies Law

Under the Companies Law, the board of directors of a publicly traded company is required to make a determination as to the minimum number of directors (not merely external directors) who must have accounting and financial expertise (according to the same criteria described above with respect to external directors under “—External Directors”). In accordance with the Companies Law, the determination of the board should be based on, among other things, the type of the company, its size, the volume and complexity of its activities and the number of directors. Based on the foregoing considerations, our board of directors determined that the number of directors with financial and accounting expertise in our company shall not be less than one. As described above under “—External Directors,” currently each of Messrs. Ovadia and Ben-Artzy has been determined by our board of directors to possess such accounting and financial expertise.

Unaffiliated Directors Under the Companies Law

Under a recent amendment to the Companies Law, the audit committee of a publicly traded company must consist of a majority of unaffiliated directors. An “unaffiliated director” is defined as an external director and as a director who meets the following criteria:

• he or she meets the qualifications for being appointed as an external director, except for (i) the requirement that the director be an Israeli resident (which does not apply to companies whose securities have been offered outside of Israel or are listed outside of Israel) and (ii) the requirement for accounting and financial expertise or professional qualifications; and

• he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than two years in the service shall not be deemed to interrupt the continuation of the service.

The foregoing amendment to the Companies Law further provides that a company may also elect to impose, via the adoption of a proposed set of corporate governance rules, certain independence requirements with respect to the composition of the board of directors as a whole. Those requirements, if undertaken by a company, mandate that (i) if the company has no controlling shareholder or no shareholder that holds at least 25% of the company’s voting rights, most of the members of the board must be unaffiliated directors, whereas (ii) if the company has a controlling shareholder or a shareholder that holds at least 25% of the voting rights, then at least one-third of the directors need to be unaffiliated directors.

As of the date of this annual report, we have not elected to impose these additional board independence requirements.

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Audit Committee

The Companies Law requires public companies such as ours to appoint an audit committee comprised of at least three directors, including all of the external directors, one of whom must serve as chairman of the committee. The chairman of the board of directors, or any director employed by or otherwise providing services to the company or to a controlling shareholder or any entity controlled by a controlling shareholder, may not be a member of the audit committee.

Our audit committee convenes at least once per quarter to review our quarterly financial results and to address other matters within the committee’s responsibilities. Messrs. Ovadia, Ben-Artzy and Perry, of whom Mr. Ovadia and Mr. Ben-Artzy are external directors, are members of our audit committee.

Role of Audit Committee under Companies Law

Under the Companies Law (under an amendment adopted in 2011), our audit committee is responsible for (i) determining whether there are delinquencies in the business management practices of the company, including consultation with the company’s internal auditor or the independent auditor, and making recommendations to the board to improve such practices, (ii) determining whether to approve certain related party transactions (including compensation of office holders (as defined below)) or transactions in which an office holder has a personal interest and whether such transaction is material, (iii) where the board of directors approves the working plan of the internal auditor, to examine such working plan before its submission to the board and propose amendments thereto, (iv) examine the company’s internal controls and internal auditor���s performance, including whether the internal auditor has sufficient resources and tools to dispose of his responsibilities (taking into consideration the company’s special needs and size), (v) examine the scope of the company’s auditor’s work and compensation and submit its recommendation with respect thereto to the corporate organ considering the appointment thereof (either the board or the general meeting of shareholders) and (vi) determine procedures with respect to the treatment of company employees’ complaints as to the management of the company’s business and the protection to be provided to such employees.

Conflicts of Interest

An audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, or take any other action required under the Companies Law, unless at the time of approval a majority of the committee’s members are present, of whom a majority consist of unaffiliated directors and at least one of them is an external director.

Role of Audit Committee under U.S. law

Under the Sarbanes-Oxley Act, the audit committee (i) has the sole authority and responsibility to select, evaluate, and, where appropriate, replace the company’s independent auditors, (ii) is directly responsible for the appointment, compensation and oversight of the work of the independent auditors for the purpose of preparing its audit report or related work, and (iii) is responsible for establishing procedures for (A) the receipt, retention and treatment of complaints received by the company regarding accounting, internal accounting controls or auditing matters, and (B) the confidential, anonymous submission by employees of the company of concerns regarding questionable accounting or auditing matters. The audit committee is required to consult with management but may not delegate these responsibilities.

Pursuant to other responsibilities with which it is charged under the Sarbanes-Oxley Act, our audit committee assists our board of directors in fulfilling its responsibility to oversee management’s conduct of the financial reporting process, the systems of internal accounting and financial controls and the annual independent audit of our financial statements. The audit committee reviews with management and our outside auditors the audited financial statements included in our Annual Report on Form 20-F.

In discharging its oversight role, our audit committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities and personnel of our company and the power to retain outside counsel, auditors or other experts for this purpose.

Internal Auditor

Under the Companies Law, the board of directors should appoint an internal auditor, nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an office holder, or an interested party (i.e., a holder of 5% or more of the voting rights in the company or of the issued share capital, the chief executive officer of the company or any of its directors, or a person who has the authority to appoint the company’s chief executive officer or any of its directors), or a relative of an office holder or of an interested party. In addition, the company’s independent auditor or its representative may not serve as the company’s internal auditor.

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Compensation Committee

Our compensation committee fulfills the roles required for it in accordance with Amendment 20. Under that amendment, the compensation committee is responsible for (a) recommending the compensation policy to our board of directors for its approval (and subsequent approval by our shareholders) and (b) duties related to the compensation policy and to the compensation of our office holders as well as functions previously fulfilled by our audit committee with respect to matters related to approval of the terms of engagement of office holders, including:

• recommending whether a compensation policy should continue in effect, if the then-current policy has a term of greater than three (3) years (approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three years);

• recommending to the board periodic updates to the compensation policy;

• assessing implementation of the compensation policy; and

• determining whether the compensation terms of the chief executive officer of the company need not be brought to approval of the shareholders (under special circumstances).

The compensation committee must consist of at least three (3) members, including all of our external directors. Each remaining compensation committee member must be a director whose compensation does not exceed an amount that may be paid to an external director. The compensation committee is subject to the same Companies Law restrictions as the audit committee as to (a) committee membership and (b) who may not be present during committee deliberations.

The members of our compensation committee consist of Mr. Ovadia and Mr. Ben-Artzy, our external directors, as well as Mr. Perry, whose compensation does not exceed that of our external directors.

Strategy Committee

Our strategy committee was established in May 2013. Under its charter, this committee’s role is to review and advise the board of directors in matters relating to strategic actions of our company that are outside the ordinary course of our business, provided, however, that the board may not delegate any of its powers to the strategy committee. The directors who are members of this committee consist of Messrs. HaCohen, Ovadia, Ben-Artzy, and Lewis IV. Our chief executive officer, Mr. Ish-Shalom, is also a member of the strategy committee.

Exculpation, Insurance and Indemnification of Directors and Officers

The Companies Law codifies certain requirements and optional provisions that apply in our relationship with our “office holders.” An office holder is defined in the Companies Law as a (i) director, (ii) general manager, (iii) chief business manager, (iv) deputy general manager, (v) vice general manager, (vi) another manager directly subordinate to the general manager or (viii) any other person assuming the responsibilities of any of the forgoing positions without regard to such person’s title. Our office holders consist of the individuals listed in the table under “Directors and Senior Management,” which is displayed under “Item 6. Directors, Senior Management and Employees”. Under the Companies Law, an Israeli company may not exempt an office holder from liability with respect to a breach of his or her duty of loyalty, but may exempt in advance an office holder from his or her liability to the company, in whole or in part, with respect to a breach of his duty of care, provided, however, that such a breach is not related to a distribution of a dividend or any other distribution by the company.

We have entered into an undertaking to indemnify our office holders in specified limited categories of events and in specified amounts, subject to the limitations set by the Companies Law and our Articles of Association, and have furthermore obtained directors and officers insurance. For more information, see “Directors and Officers Insurance” and “Indemnification of Office Holders” under Item 7 below.

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Employees

As of December 31, 2013, we had 23 employees in Israel, and 39 in the United States. Of our 62 employees, 11 were engaged in research and development, 16 in sales, marketing and business development, 27 in professional services and technical support and 8 in finance, administration and operations.

As of December 31, 2012, we had 23 employees in Israel, and 38 in the United States. Of our 61 employees, 12 were engaged in research and development, 15 in sales, marketing and business development, 26 in professional services and technical support and 8 in finance, administration and operations.

As of December 31, 2011, we had 23 employees in Israel, and 37 in the United States. Of our 60 employees, 12 were engaged in research and development, 15 in sales, marketing and business development, 25 in professional services and technical support and 8 in finance, administration and operations.

None of our employees is represented by a labor union.

We are not a party to any collective bargaining agreement with our employees. However, some provisions of the collective bargaining agreement between the Histadrut, the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialists’ Association of Israel, are applicable to our Israeli employees under expansion orders of the Israeli Ministry of Labor and Welfare. These provisions principally concern the length of the work day and the work week, minimum wages for workers, contributions to pension funds, insurance for work-related accidents, procedures for dismissing employees and determination of severance pay. Under these provisions, the wages of most of our employees are automatically adjusted based on changes in the Israeli consumer price index. The amount and frequency of these adjustments are modified occasionally. We consider our relationship with our employees to be good and have never experienced a strike or work stoppage.

We have to comply with various labor and immigration laws throughout the world, including laws and regulations in Israel and the United States. Compliance with these laws has not been a material burden for us. If the number of our employees increases over time, our compliance with these regulations could become more burdensome.

Share Ownership

As of June 23, 2014, the aggregate number of our Ordinary Shares (including 326,797 Ordinary Shares which may be issued upon conversion of Preferred A Shares at a one-for-one ratio) that are beneficially owned by our directors and executive officers as a group was 1,510,386, constituting a 33.5% beneficial ownership interest in our company. The above number does not take into account 210,000 restricted Ordinary Shares, granted to our directors under our equity compensation plans, that had not yet been released from restrictions and will not be released from restriction within 60 days of June 23, 2014. The restricted Ordinary Shares had been granted for no consideration. Also as of June 23, 2014, no options were outstanding that had been granted to our directors and executive officers under our equity compensation plans.

The aggregate number of our Ordinary Shares beneficially owned by our directors and executive officers as a group also includes Ordinary Shares, as well as Ordinary Shares underlying Preferred A Shares, that are held by Jerusalem High-tech Founders, Ltd. and Ordinary Shares that are held by Jerusalem Technology Investments Ltd., since two of their respective affiliates serve on our board of directors and, accordingly, such affiliates may be deemed to be the beneficial owners of the Ordinary Shares held thereby (although these affiliates disclaim such beneficial ownership, except to the extent of their respective pecuniary interests therein). The aggregate number of our Ordinary Shares beneficially owned by our directors and executive officers as a group excludes the 297,081 Ordinary Shares held by Telvent since none of our current directors and officers is affiliated with Telvent (despite its above-described general Board designation rights). See Item 7- “Major Shareholders and Related Party Transactions” below for more details concerning the beneficial ownership of our Ordinary Shares by our individual directors and executive officers. Other than as detailed in Item 7 below, none of our directors and executive officers beneficially owns more than 1% of our outstanding shares.

Shares held by our directors and executive officers do not possess different voting rights than any shares held by any of our other shareholders.

Option Plans

We currently maintain two option plans, the 2005 Share Option Plans (as defined below). The purposes of the option plans are to provide an incentive to the officers, directors, employees and consultants of our company, or of any of our subsidiaries, to acquire a proprietary interest in us, to continue as officers, directors, employees and consultants, to increase their efforts on behalf of ViryaNet and to promote the success of our business.

In the past, we maintained a 1996 Stock Option and Incentive Plan, 1997 Stock Option and Incentive Plan, 1998 Stock Option and Incentive Plan and 1999 Stock Option and Incentive Plan, each of which has expired. The 291,466 Ordinary Shares that were still available for grant of additional options under these plans prior to the expiration thereof were transferred to the 2005 Share Option Plans. All options granted under those 1996, 1997, 1998 and 1999 plans have expired.

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The 2005 Share Option Plans

In 2005, our board of directors believed that it was appropriate for us to adopt and approve, subject to shareholders’ approval, a new form of Israeli share option and restricted share plan and a new form of international share option and restricted share plan, which we refer to collectively as the 2005 Share Option Plans, which were to supersede and replace all existing options plans, including our then-current 1999 Stock Option and Incentive Plan. The 2005 Share Option Plans were approved by our shareholders at our annual general meeting held on November 29, 2005.

The 2005 Share Option Plans provide for the grants of options, restricted shares and other share based awards to employees, directors, office holders, service providers, consultants and any other person or entity that provides services that our board of directors decides are valuable to us or our affiliates. The 2005 Share Option Plans provide for the grant of “incentive stock options” (options that qualify for special tax treatment under Section 422 of the U.S. Internal Revenue Code), nonqualified stock options, “102 Share Options” (options that qualify for special tax treatment under Section 102 of the Israeli Tax Ordinance (New Version) 1961 (the “Ordinance”), “102 Shares” (shares that qualify for special tax treatment under Section 102 of the Ordinance) “3(I) Stock Options” (options subject to tax treatment under Section 3(I) of the Ordinance), restricted shares and other share based awards such as restricted shares units.

As of the effectiveness of the 2005 Share Option Plans, any options that had remained available for grants under any of our prior stock option plans became available for subsequent grants of awards under the 2005 Share Option Plans. In addition, if any outstanding award under our then-existing option plans should, for any reason, expire, be canceled or be forfeited without having been exercised in full, the shares subject to the unexercised, canceled or terminated portion of such award shall become available for subsequent grants of awards under the 2005 Share Option Plans.

As of June 23, 2014, grants of restricted shares relating to a total of 210,000 Ordinary Shares, in the aggregate, were outstanding under the 2005 Share Option Plans, and 123,784 Ordinary Shares were available for additional grants under the 2005 Share Option Plans.

Administration of Our Option Plans

Our share option plans are administered by our board of directors. Under our share option plans, the exercise price of options is determined by our board of directors. The board of directors also determines the vesting schedule of option and restricted share grants, but generally option and restricted share grants vest over a one to three year period. Each option granted under the share option plans is exercisable, unless extended, until seven years from the date of the grant of the option. The 2005 Share Option Plans will expire on December 31, 2015.

Item 7. Major Shareholders and Related Party Transactions

Major Shareholders

The following table summarizes information about the beneficial ownership of our outstanding Ordinary Shares as of June 23, 2014 for each person or group that we know owns 5% or more of our outstanding Ordinary Shares, and for our directors and executive officers as a group.

We determine beneficial ownership of shares under the rules of the Securities and Exchange Commission and include any Ordinary Shares over which a person possesses sole or shared voting or investment power, or the right to receive the economic benefit of ownership, or for which a person has the right to acquire any such beneficial ownership at any time within 60 days of June 23, 2014. Because the holders of our Preferred A Shares are entitled to identical rights as holders of our Ordinary Shares (except that Preferred A Shares have superior liquidation preferences) and because the Preferred A Shares are convertible into Ordinary Shares on a one for one basis at any time at the election of the holders thereof, we have included such shares together with our Ordinary Shares in calculating the number of shares held, and beneficial ownership percentages, provided below, indicating, however, where applicable, as to the number of Preferred A Shares included in the ownership of any shareholder listed below. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table possess sole voting and investment power for all Ordinary Shares held by them. Applicable percentage ownership in the following table is based on 4,506,724 Ordinary Shares outstanding as of June 23, 2014, which include 326,797 Ordinary Shares issuable upon conversion of an equivalent number of Preferred A Shares.

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Ordinary Shares Beneficially Owned

Name and Address	Number			Percent of Class
Lewis Opportunity Fund Group 45 Rockefeller Center Suite 2570 New York, NY 10111		733,388	(1)		16.3	%
Jerusalem High-tech Founders, Ltd. c/o Hamotal Insurance Agency 9 HaRatom Street Har Hotzvim Jerusalem 41450 Israel		356,721	(2)		7.9	%
Memy Ish-Shalom 1 Grant Road, Westborough, MA, 01581		303,104			6.7	%
Telvent Investments, S.L Valgrande 6, 28108 Alcobendas, Madrid, Spain		297,081			6.6	%
Ephraim Fields		196,145	(3a)		4.3	%(3b)
All directors and executive officers as a group (8 persons)		1,510,386	(4)		33.5	%

(1) Includes

(i) 386,211 Ordinary Shares held by Lewis Opportunity Fund LP,and (ii) 347,177 Ordinary Shares held by Mr. Austin Lewis, who serves on our board of directors and has a financial interest in The Lewis Opportunities Fund Group.

(2) Includes (i) 1,315 Ordinary Shares held by Jerusalem High-tech Founders Ltd., (ii) 32,593 Ordinary Shares, in the aggregate, held by Mr. HaCohen and Mr. Morgenstern, who serve on our board of directors and have a financial interest in Jerusalem High-tech Founders, Ltd. and Jerusalem Technology Investments Ltd., and (iii) 322,813 Preferred A Shares, which can be converted to Ordinary Shares on a one-for-one basis at any time, held by Jerusalem High-tech Founders Ltd.

(3) a. Represents shares beneficially owned as of January 23, 2014, as indicated in the report of beneficial ownership on Schedule 13G filed by Ephraim Fields on January 24, 2014.

b. As of June 23, 2014, if the number of shares beneficially owned by Ephraim Fields has not changed, this shareholder’s percentage ownership of our outstanding ordinary shares will have dropped below 5% (based on an increase in the number of our outstanding ordinary shares from the number upon which the percentage expressed in this shareholder’s Schedule 13G was based, to the actual number of our outstanding shares as of June 23, 2014). We cannot verify, however, as to this shareholder’s actual holdings as of June 23, 2014 and we have therefore included this shareholder in the above beneficial ownership table, based on the possibility that his holdings may still exceed 5% of our outstanding ordinary shares.

(4) This number includes the following shares beneficially owned by those directors and executive officers who beneficially own more than 1% of our outstanding shares: (i) 334,362 shares or 7.4% of our outstanding shares beneficially owned by Samuel HaCohen, the Executive Chairman of our board of directors, out of which (a) 10,234 Ordinary Shares are held directly by Mr. HaCohen and (b) 322,813 Preferred A Shares and 1,315 Ordinary Shares are held by Jerusalem High-tech Founders Ltd (“Jerusalem High-tech”); (ii) 346,487 shares or 7.7% of our outstanding shares beneficially owned by Vladimir Morgenstern, a director of ours, out of which (a) 22,359 Ordinary Shares are held directly by Mr. Morgenstern, and (b) 322,813 Preferred A Shares and 1,315 Ordinary Shares are held by Jerusalem High-tech (the 322,813 Preferred A Shares, 1,315 Ordinary Shares held by Jerusalem High-tech are included only once under the aggregate directors and executive officers’ beneficial ownership); (iii) 303,104 Ordinary Shares or 6.7% of our Ordinary Shares held by Memy Ish-Shalom, our president and chief executive officer; (iv) 733,388 shares or 16.3% of our outstanding shares, beneficially owned by Austin W. Lewis IV, a director of ours, out of which (a) 347,177 Ordinary Shares are held by Mr. Lewis, and (b) 386,211 Ordinary Shares are beneficially owned by Lewis Opportunity Fund Group and its affiliates (as described in footnotes 1(i),and 1(ii) above), which Mr. Lewis may be deemed to beneficially own due to his financial interest in the Lewis Opportunity Fund Group and (v) 84,673 Ordinary Shares or 1.9% of our Ordinary Shares held by Yohanan Engelhardt, our chief financial officer. There are no options and restricted shares granted to our directors and executive officers that are exercisable or for which the restrictions thereon lapse within 60 days of June 23, 2014. The number of shares in this row which are counted as beneficially owned by our executive officers and directors excludes the 297,081 Ordinary Shares held by Telvent since none of our current directors or officers is affiliated with Telvent (despite its general Board appointment rights).

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Other than as detailed immediately above, none of our directors and executive officers beneficially owns more than 1% of our outstanding shares.

Record Holders

Based upon a review of the information provided to us by our transfer agent, as of June 23, 2014, there were 118 holders of record of our Ordinary Shares (including Ordinary Shares issuable upon conversion of our outstanding Preferred A Shares), of which 87 record holders holding 3,549,666, or approximately 79%, of our outstanding Ordinary Shares (including Ordinary Shares issuable upon conversion of our Preferred A Shares) reside in the United States. These numbers are not representative of the number of beneficial holders of our shares, nor are they representative of where such beneficial holders reside, since many of these shares were held of record by various nominees (including CEDE & Co, the U.S. nominee company of the Depository Trust Company, which holds of record approximately 56% of our outstanding shares).

Our major shareholders do not have different voting rights than any other holders of our shares.

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Recent Significant Changes in the Percentage Ownership of Major Shareholders during the past three years:

All significant changes in the percentage ownership of our major shareholders (that is, 5% or greater shareholders) during the past three years are described below (under “Related Party Transactions”). The aggregate changes in the percentage ownership of our major (that is, 5% or greater) shareholders during the past three years can be summarized as follows:

	As of December 31, 2010				As of December 31, 2013
	Number of Outstanding Shares		%		Number of Outstanding Shares		%
Total shares held by all		3,561,880				4,105,922
Lewis Opportunity Fund Group		426,636		12.0		369,752		9.0
Jerusalem High-tech Founders Group		354,115		9.9		511,722		12.5
Telvent		292,081		8.2		297,081		7.2
LibertyView Opportunity Fund		329,280		9.2		22,033		0.5
Memy Ish-Shalom		124,500		3.5		381,938		9.3

Arrangements Related to Change of Control

On June 10, 2014, we entered into an Agreement and Plan of Merger, or the merger agreement, with Verisae, Inc., a Minnesota corporation, and its wholly-owned subsidiary, under which we agreed to be acquired by Verisae, Inc., or Verisae.

The merger agreement calls for Verisae to acquire all of the issued and outstanding shares of our company for aggregate cash consideration of $18,825,000 to our shareholders, subject to a net cash adjustment to be made as of the closing of the transaction. We currently anticipate that the consideration per Ordinary share payable at closing shall be in the range of $3.15-$3.40 per share. Closing is expected within approximately 75 days of the signing date of the merger agreement, subject to regulatory approvals in Israel and approval by our shareholders.

As a result of the acquisition, we will become a strategic business unit of Verisae, a global provider of the Connected Facility – an integrated software platform that combines maintenance, machine to machine monitoring, energy, and sustainability software solutions into one.

There are no assurances that our shareholders will approve the merger and merger agreement or that the merger will be successfully consummated. For a description of this transaction and the risks related thereto (including our potential failure to consummate the transaction), please see the proxy statement for the extraordinary general meeting of shareholders at which the transaction will be subject to approval by our shareholders, which is attached to our Report of Foreign Private Issuer on Form 6-K that we furnished to the SEC on July 1, 2014 and which is incorporated by reference herein. Please also the merger agreement included as Exhibit 4.18 to this annual report.

Related Party Transactions

Debt Owed by an Officer of a Former Subsidiary

On December 31, 2011, we completed the sale of 100% of the common stock of ViryaNet Pty, to Hosking Family Trust, owned by the former general manager of ViryaNet Pty, Mark Hosking, to whom we refer to as the Buyer, for consideration of $340,000. The consideration is being paid as follows; $100,000 paid on January 2, 2012, and the balance of $240,000 is paid over a period of four years in equal quarterly installments starting March 31, 2012, and bears a fixed annual interest of 3.5%, paid quarterly (we refer to these deferred payments as the Long-term Receivable). The Long-term Receivable repayment is secured through a personal guarantee provided by the Buyer as security for the full repayment of the Long-term Receivable. This transaction constituted an extraordinary transaction with the Buyer who possessed a personal interest and was therefore approved by our audit committee and board of directors in accordance with the requirements of the Companies Law.

Equity Financing

On June 30, 2011, we entered into a share purchase agreement with Jerusalem Technology Investments Ltd., or the Investor, a company with which two of our directors—Samuel HaCohen and Vladimir Morgenstern— and one of our major shareholders (Jerusalem High-tech Founders, Ltd.) are affiliated. Pursuant to the agreement, the Investor committed to invest $250,000 in our company for 250,000 of our Ordinary Shares, reflecting a price of $1.00 per Ordinary Share, within 31 days from the date of the agreement, The Investor has made a total investment of $125,000 under the share purchase agreement ($50,000 in June 2011 and

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$75,000 in February 2012). This equity financing constituted an extraordinary transaction with an entity in which two of our directors possessed a personal interest and therefore required, and received, the approval of our audit committee and board of directors pursuant to the provisions of the Companies Law.

On December 17, 2012 we and the Investor reached an agreement according to which the parties agreed to terminate the share purchase agreement by mutual consent such that no further investment will be made under the share purchase agreement by the Investor. Under this agreement, both we and the Investor released each other from any claims related to the share purchase agreement. In lieu of the additional amount of $125,000 that was not invested, Samuel HaCohen, our chairman and an affiliate of the Investor, signed a personal guarantee in favor of two banks, Bank Otsar Ha-Hayal and Bank Leumi, in order to enable us to secure loans from these banks (see Item 5. Operating and Financial Review and Prospects- Government Guaranteed Bank Financing). No further consideration was provided to the Investor and/or Samuel HaCohen in connection with the personal guarantee. This agreement constituted an extraordinary transaction with a director who possessed a personal interest and was therefore approved by our audit committee and board of directors in accordance with the requirements of the Companies Law.

Loans

In June 1999, our board of directors approved our issuance to Mr. HaCohen of 3,478 Series C-2 Preferred Shares (which were converted into 3,478 Ordinary Shares upon the closing of our IPO), in consideration of his payment of $100,000, the funds for which Mr. HaCohen borrowed from us. The loan was approved by our shareholders in June 2000 and bears annual interest at the rate of 6.5%. Repayment of the loan is due when Mr. HaCohen sells or otherwise disposes of the shares subject to the loan. In addition, we, in our sole discretion, may call for immediate repayment of the loan and the interest thereon in the event that (i) Mr. HaCohen becomes bankrupt or files a motion for bankruptcy, or (ii) Mr. HaCohen ceases to remain in the employment of our company for any reason.

Directors and Officers Insurance

We have obtained directors’ and officers’ liability insurance for the benefit of our directors and office holders and intend to continue to obtain such insurance and pay all premiums thereunder to the fullest extent permitted by the Companies Law.

Indemnification of Office Holders

Our Articles of Association provide that we may indemnify an office holder (as defined under the Companies Law and described under “Exculpation, Insurance and Indemnification of Directors and Officers” in Item 6 above) against:

• a financial liability imposed on him/her in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court concerning an act performed in his/her capacity as an office holder;

• reasonable litigation expenses, including attorneys’ fees, expended by the office holder or charged to him/her by a court in proceedings we institute against him/her, instituted on our behalf, or instituted by another person, in each case relating to an act performed in his/her capacity as an office holder; and

• reasonable litigation expenses relating to an act performed in his/her capacity as an office holder, including attorneys’ fees, expended by the office holder or charged to him/her by a court in a criminal proceeding from which he/she was acquitted, or a criminal proceeding in which he/she was convicted for a criminal offense that does not require proof of intent.

Our Articles of Association also include:

• authorization to undertake, in advance, to indemnify an office holder, provided that the undertaking is limited to specified events which the board of directors believes are anticipated and limited in amount determined by the board of directors to be reasonable under the circumstances; and

• authorization to indemnify an office holder retroactively.

We have agreed to indemnify our office holders under indemnification agreements with each office holder. We have also exempted, and agreed to indemnify our office holders from liabilities resulting from acts performed by them in their capacity as officer holders to the maximum extent permitted under the Companies Law.

Interests of Experts and Counsel

Not applicable.

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Item 8. Financial Information

Consolidated Statements and Other Financial Information

Our consolidated financial statements and other financial information are included in this annual report in “Item 18 - Financial Statements”.

Legal Proceedings

We are not involved in any legal proceedings that we believe, individually or in the aggregate, will have a significant effect on our financial position or profitability.

Dividend Distribution Policy

We have never declared or paid dividends to our shareholders and we do not intend to pay dividends in the future. We anticipate that we will retain all of our future earnings, if any, for use in the expansion and operation of our business rather than for the payment of dividends.

Significant Changes

Since the date of our consolidated financial statements included in this annual report, there has not been a significant change in our company other than as described (if at all) in the notes to such financial statements.

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Item 9. The Offer and Listing

Market Price Information

Through April 30, 2014, the high and low reported sales prices for our Ordinary Shares were as follows for the periods indicated below:

Period	High		Low
Years ended:
December 31, 2013	$	2.74	$	0.44
December 31, 2012	$	1.08	$	0.45
December 31, 2011		1.15	$	0.42
December 31, 2010		1.50		0.60
December 31, 2009		1.50		0.10
Quarters:
2014
Second Quarter, ended June 30, 2014		4.00		2.44
First Quarter, ended March 31, 2014		4.50		2.52
2013
Fourth Quarter, ended December 31, 2013		2.74		1.10
Third Quarter, ended September 30, 2013		1.20		0.95
Second Quarter, ended June 30, 2013		1.28		0.62
First Quarter, ended March 31, 2013		0.65		0.44
2012
Fourth Quarter, ended December 31, 2012		0.75		0.53
Third Quarter, ended September 30, 2012		1.08		0.50
Second Quarter, ended June 30, 2012		1.00		0.75
First Quarter, ended March 31, 2012		1.00		0.45
Most Recent Six Months	High		Low
June 2014		3.17		2.65
May 2014		3.82		2.44
April 2014		4.00		3.50
March 2014		4.20		3.45
February 2014		4.50		3.18
January 2014		3.30		2.52

Markets on Which Our Ordinary Shares Trade

In April 2010, upon the launch by OTC Markets Group of its new OTCQB marketplace for reporting issuers who are current in their Exchange Act reports, our Ordinary Shares began to be quoted in that marketplace under the ticker symbol “VRYAF”. As of the current time, that remains the only marketplace in which our Ordinary Shares are quoted.

For further information, see “Risk Factors—Our Ordinary Shares are quoted on the OTCQB, and previously were quoted on the Pink Sheets, which has adversely affected, and may continue to adversely affect, the market price of, and trading market for, our Ordinary Shares” in Item 3 above.

Item 10. Additional Information

Share Capital

Not applicable.

Memorandum and Articles of Association

Register

Our registration number at the Israeli registrar of companies is 511281354.

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Company’s Objectives

Our company’s objectives, as set forth in Section 3 of our Articles of Association, are to carry on any business and do any act, which is not prohibited by law. We may also make contributions of reasonable sums to worthy purposes even if such contributions are not made on the basis of business considerations.

Approval of Transactions Involving Directors and Office Holders

Any director is generally entitled to attend and vote at any meeting of our board of directors. The Companies Law requires, however, that a director or other office holder of a company promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. The disclosure must be made to our board of directors and/or shareholders a reasonable period of time prior to the meeting at which the transaction is to be discussed. A personal interest, as defined under the Companies Law, includes any personal interest held by the office holder’s spouse, siblings, parents, grandparents or descendants; spouse’s descendants, siblings or parents; and the spouses of any of the foregoing, and also includes any interest held by any corporation in which the office holder owns 5% or more of the share capital, is a director or general manager or in which he or she has the right to appoint at least one director or the general manager. A personal interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the interest of the office holder with respect to his or her vote on behalf of the shareholder for whom he or she holds a proxy even if such shareholder itself has no personal interest in the approval of the matter.

In the case of a transaction which is not an extraordinary transaction (as defined below) and does not involve the compensation of the director or other office holder, after the director or other office holder complies with the above disclosure requirement, only approval by our board of directors is required unless the articles of association of the company provide otherwise (ours do not provide otherwise).

If the transaction is an extraordinary transaction, then, in addition to any approval required by our Articles of Association, the transaction must be approved by both our audit committee and our board of directors, and, under specified circumstances, by a meeting of our shareholders. An office holder who has a personal interest in a matter that is considered at a meeting of our board of directors or the audit committee may not be present at the meeting or vote on the matter, subject to certain exceptions, including an allowance for him or her to be present in order to present the transaction, if the chairman of our board of directors or audit committee (as applicable) determines that such presentation by him or her is necessary. If the majority of the members of our board of directors or audit committee, as applicable, have a personal interest in a transaction, they may all be present for the presentation of, and voting upon, the transaction, but it must also then be approved by our shareholders. Notwithstanding having been approved in compliance with the foregoing processes, any transaction in which an office holder has a personal interest must, in addition, not be adverse to our company’s interest in order for it to be properly approved.

An extraordinary transaction is defined as a transaction not in the ordinary course of business, not on market terms, or that is likely to have a material impact on a company’s profitability, assets or liabilities.

Under Amendment 20, compensation arrangements of office holders require the approval of our compensation committee, the board of directors and, in certain cases (for directors, the chief executive officer, and any executive officer whose compensation terms do not conform with the then existing compensation policy), the shareholders, in that order. Compensation of an individual office holder, including the chief executive officer (but excluding a director), that departs from the company’s compensation policy may be adopted under special circumstances, despite failure to obtain shareholder approval if, following the relevant shareholder vote, the compensation committee followed by the board once again approve the compensation, based on renewed and specific analysis of relevant factors.

Board Meetings

Until otherwise decided by our board of directors, a quorum at a meeting of our board of directors shall be constituted by the presence in person, by alternate or by telephone or similar communication equipment, of a majority of the directors then in office who are lawfully entitled to participate and vote at the meeting. If within one-half hour (or within such longer time not to exceed one (1) hour, as the Chairman of the meeting, at his discretion, may decide) from the time appointed for the convening of the board meeting, a quorum is not present, the board meeting shall stand adjourned to the same day in the next week at the same time and place (unless such day shall fall on a public holiday either in Israel or the United States, in which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public holiday). If, at such adjourned board meeting, a quorum is not present within half an hour from the time appointed for holding the meeting, the directors present, in person, by alternate or by telephone or similar communication equipment who are lawfully entitled to participate and vote at such meeting, shall be a quorum.

Our business is managed by the board of directors, which may exercise all such company powers and perform on our behalf all such acts as may be exercised and performed by us as are not by the Companies Law or by our Articles of Association required to be

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exercised or done by us through a general meeting of our shareholders. Our Articles of Association provide that the board of directors may from time to time, at its discretion, cause us to borrow or secure the payment of any sum or sums of money for the Company’s purposes, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions as it deems fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking of the whole or any part of our property, both present and future, including its uncalled or called but unpaid capital for the time being.

There is no age limit as to the ability of individuals to serve as members of our board of directors.

A director is not required to hold our shares as a condition to his or her nomination or election as a director.

Rights attached to our shares

We have two classes of shares authorized and outstanding: Ordinary Shares and Preferred A Shares. The rights attached to the Preferred A Shares are the same rights attached to our Ordinary Shares, except that the Preferred A Shares have superior liquidation preference (as set forth below), and, for purposes of the disclosure in this annual report, we have generally treated the Preferred A Shares as Ordinary Shares, except where explicitly described to the contrary.

Right to receive dividends and other distributions

All dividends (if any) that may be declared by our board of directors shall be declared and paid in proportion to the amount paid up on account of the nominal value of the Ordinary Shares in respect of which the dividend is being paid. As regards to Ordinary Shares not fully paid throughout the period in respect of which the dividend is paid, dividends in respect thereto shall be apportioned and paid pro rata according to amounts deemed under our Articles of Association to be paid up on account of the nominal value of such shares during any portion or portions of the period in respect of which the dividend is paid.

The distribution of dividends is under the discretion of our board of directors, which is under no obligation to distribute dividends to our shareholders out of the Company’s profits.

In the event of any liquidation, dissolution or winding up of the Company, the Preferred A Shares will entitle their holders to receive (from assets and funds legally available for distribution to the shareholders), and prior to the pro-rata distribution to all of the Ordinary Shares of the Company, per each such Preferred A Share, an amount equal to the Preferred A Share’s original issue price (adjusted for share combinations or subdivisions or other recapitalizations of the Company’s shares) (the “Preferred A Share Liquidation Preference”). Following such distribution of the Preferred A Share Liquidation Preference to the holders of Preferred A Shares, the Preferred A Shares shall not participate in the distribution of the remaining assets to the shareholders of the Company and their holders shall not be entitled to any additional distributions.

Shareholder voting rights and procedures

Under our Articles of Association, every shareholder who is present, in person, by proxy, or by written ballot or is deemed under the Companies Law to be present at a general meeting of the shareholders, is entitled to one vote for each Ordinary Share of which he or she is the holder, and the vote of a majority of the voting power of shareholders who are present and voting at a meeting is generally required to approve a given matter.

Under the Companies Law, a controlling shareholder of a public company, which includes a shareholder that holds 25% or more of the voting rights in the company if no other shareholder owns more than 50% of the voting rights in the company, must disclose its interest in a prospective transaction with the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, or a transaction with a controlling shareholder or his or her relative, directly or indirectly, including for receipt of services from an entity controlled by him or her (or his or her relative), require the approval of the audit committee, the board of directors and the shareholders of the company. The terms of engagement and compensation of a controlling shareholder who is an office holder or an employee of the company require the approval of the compensation committee, the board of directors and the shareholders of the company. The shareholder approval must, in each case, include the holders of a majority of the shares held by all shareholders who have no personal interest in the transaction and are voting on the subject matter (with abstentions being disregarded) or, alternatively, the total shares of shareholders who have no personal interest in the transaction and who vote against the transaction must not represent more than two percent (2%) of the voting rights in the company. To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every three years, unless the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto. In certain cases provided in regulations promulgated under the Companies Law, shareholder approval is not required.

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The approvals of the board of directors and shareholders are required for a private placement of securities (or a series of related private placements during a 12-month period or that are part of one continuous transaction or transactions conditioned upon each other) in which:

• the securities issued represent at least 20% of the company’s actual voting power prior to the issuance of such securities, and such issuance increases the relative holdings of a 5% shareholder or causes any person to become a 5% shareholder, and the consideration in the transaction (or a portion thereof) is not in cash or in securities listed on a recognized stock exchange, or is not at a fair market value; or

• a person would become, as a result of such transaction, a controlling shareholder of the company.

The foregoing approval rules for private placements do not apply to a company like ours, whose securities were offered only outside of Israel or are listed or quoted only outside of Israel.

Further, under the Companies Law (as described under “Item 6. Directors, Senior Management and Employees— Board Practices— External Directors— How External Directors Are Elected”), the appointment of external directors requires, in addition to a majority of the ordinary shares voting and approving the appointment, that either (a) the approving majority must include a majority of the shares of shareholders that are not controlling shareholders of the company and who do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) and who are present and voting (with abstentions being disregarded), or (b) the shares of such non-controlling, non-interested shareholders that vote against the appointment may not constitute more than two percent (2%) of our total voting rights. In addition, as described below (see “—Changes of rights attached to our shares” in this Item 10), under our Articles of Association, the alteration of the rights, privileges, preferences or obligations of any class of our share capital requires a simple majority of the class so affected), in addition to the ordinary majority of all classes of shares voting together as a single class at a shareholder meeting.

A further exception to the simple majority shareholder vote requirement is a resolution for the voluntary winding up, or other reorganization of, the company pursuant to Section 350 of the Companies Law, which requires the approval of holders of 75% of the voting rights represented at the meeting, in person, by proxy or by voting deed and voting on the resolution, provided that such shareholders constitute more than 50% of the shareholders voting on such matter.

Changes of rights attached to our shares

Changes to the rights attached to our Ordinary Shares require the approval of shareholders present, in person, by proxy, or by written ballot, or deemed under the Companies Law to be present, holding greater than fifty percent (50%) of the total voting power attached to the Ordinary Shares whose holders were present, in person, by proxy, or by written ballot, or deemed under the Companies Law to be present, at such general meeting, and voted thereon. If, at any time, the share capital of the Company is divided into different classes of shares, the right attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may be varied only upon consent of a separate general meeting of the holders of the shares of that class, and the provisions of our Articles of Association relating to general meetings shall apply to every such separate general meeting. The enlargement of an authorized class of shares, or the issuance of additional shares thereof out of the authorized and unissued share capital, shall not be deemed to vary, modify or abrogate the rights attached to previously issued shares of such class or of any other class of shares.

General Meetings

Under the Companies Law, we are required to hold an annual general shareholders meeting once in every calendar year within a period of not more than fifteen (15) months after the last preceding annual general shareholders meeting. All general shareholders meetings other than annual general shareholders meeting are deemed to be special shareholders meetings. Our board of directors may call for a general shareholders meeting whenever it sees fit, and, under the Companies Law, is required to call a general shareholders meeting upon a demand in writing by (i) a shareholder or shareholders holding at least 5% of the outstanding shares and 1% of the voting rights in the company, or (ii) a shareholder or shareholders holding at least 5% of the voting rights in the company. Subject to applicable law and regulations, prior notice of at least 21 days of any general shareholders meeting, specifying the place, date and hour of the meeting, shall be given to the shareholders of the Company. No business shall be transacted at any general shareholders meeting unless a quorum is present when the meeting proceeds to business. For all purposes, the quorum shall not be less than two (2) shareholders present in person, or by proxy, or deemed by the Companies Law to be present at such meeting, holding, in the aggregate, at least thirty-three and one-third percent (33 and¹/3%) of the voting rights in our issued share capital. If, within half an hour from the time appointed for the meeting, a quorum is not present (or within such longer time not exceeding one (1) hour as the Chairman of the meeting may decide), the meeting, if convened upon the requisition of the shareholders, shall be dissolved; in any other case, it shall stand adjourned to the same day in the next week at the same place and time (unless such day shall fall on a public holiday either in Israel or the United States, in which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public holiday), or any other day, hour and/or place as the directors shall notify the shareholders. If a quorum is not present at the second meeting within half an hour from the time appointed for the meeting, any two shareholders present personally or by proxy or by any other valid instrument, shall constitute a quorum, and shall be entitled to deliberate and to resolve in respect of the matters for which the meeting was convened.

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Ownership of our shares

Our Articles of Association and the laws of the State of Israel do not restrict in anyway the ownership or voting of our shares by non-residents of Israel, except for shareholders who are subjects of countries which are in a state of war with Israel.

Change of Control

Our Articles of Association do not contain specific provisions intended to delay, defer or prevent a change of control. The Companies Law includes provisions with respect to the approval of corporate mergers that are applicable to us. The Companies Law permits merger transactions if approved by each party’s board of directors and shareholders. In order for shareholder approval to be obtained for a merger, a majority of the shares present and voting, excluding shares held by the other party to the merger, or by any person holding at least 25% of the means of control of the other party to the merger, or anyone acting on behalf of either of them, including any of their affiliates, must be voted in favor of the merger. If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder has a personal interest in the merger, then the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controlling shareholders (as described above in this Item 10 under “—Shareholder voting rights and procedures”). In the event that the merger transaction has not been approved by either of the above-described special majorities (as applicable), the holders of at least 25% of the voting rights of the company may apply to a court for approval of the merger. The court may approve the merger if it is found that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger. A merger may not be consummated unless at least 50 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of Companies and 30 days have passed from the date of the approval of the shareholders of the merging companies.

The Companies Law further provides that the foregoing approval requirements will not apply to shareholders of a wholly-owned subsidiary in a rollup merger transaction, or to the shareholders of the acquirer in a merger or acquisition transaction if:

• the transaction does not involve an amendment to the acquirer’s memorandum or articles of association;

• the transaction does not contemplate the issuance of more than 20% of the voting rights of the acquirer which would result in any shareholder becoming a controlling shareholder; and

• there is no “cross ownership” of shares of the merging companies, as described above.

The Companies Law also provides that the acquisition of shares in a public company on the open market must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 25% shareholder of the company. The rule does not apply if there already is another 25% shareholder of the company. Similarly, the law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a greater-than 45% shareholder of the company, unless there already is a greater-than 45% shareholder of the company. The foregoing provisions do not apply to:

• a private placement in which the company’s shareholders approved such holder owning 25% or more of the voting rights in the company (if there is no other shareholder that holds 25% or more of the voting rights in the company); or more than 45% of the voting rights in the company (if there is no other shareholder that holds more than 45% of the voting rights in the company); or

• a purchase from an existing holder of 25% or more of the voting rights in the company that results in another person becoming a holder of 25% or more of the voting rights in the company or a purchase from an existing holder of more than 45% of the voting rights in the company that results in another person becoming a holder of more than 45% of the voting rights in the company.

The Companies Law also provides that if following any acquisition of shares, the acquirer holds 90% or more of the company’s shares or of a class of shares, the acquisition must be made by means of a tender offer for all of the target company’s shares or all of the shares of the class, as applicable, not held by the acquirer. An acquirer who wishes to eliminate all minority shareholders must do so by way of a tender offer and hold, following consummation of the tender offer, more than 95% of all of the company’s outstanding shares (and provided that a majority of the offerees that do not have a personal interest in such tender offer shall have approved it, which condition shall not apply if, following consummation of the tender offer, the acquirer holds at least 98% of all of the company’s outstanding shares). If, however, following consummation of the tender offer the acquirer would hold 95% or less of the company’s outstanding shares, the acquirer may not acquire shares tendered if by doing so the acquirer would own more than 90% of the shares of the target company. Appraisal rights are available with respect to a successfully completed full tender offer for a period of six months after such completion and the acquirer may provide in the tender offer documents that a shareholder that accepts the offer may not seek appraisal rights.

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Material Contracts

During the past two years, we have not been party to any contracts that have been material to our business and that were or had been entered into outside of the ordinary course of business, other than those discussed in the “Property, Plant and Equipment” section of Item 4 above, the “Liquidity and Capital Resources” section of Item 5 above, and the “Related Party Transactions” section of Item 7 above.

Exchange Controls

There are currently no Israeli currency control restrictions on remittances of dividends on the Ordinary Shares or the proceeds from the sale of shares except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions.; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time. Non-residents of Israel who purchase our securities with non-Israeli currency will be able to repatriate dividends (if any), liquidation distributions and the proceeds of any sale of such securities, into non-Israeli currencies at the rate of exchange prevailing at the time of repatriation, provided that any applicable Israeli taxes have been paid (or withheld) on such amounts.

Neither our Memorandum of Association nor our Articles of Association nor the laws of the State of Israel restrict in any way the ownership or voting of Ordinary Shares by non-residents of Israel, except for shareholders who are subjects of countries which are in a state of war with Israel.

Taxation

The following is a discussion of Israeli and United States tax consequences material to our shareholders. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities or the courts. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.

Holders of our Ordinary Shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of Ordinary Shares, including, in particular, the effect of any foreign, state or local taxes.

United States Federal Income Tax Consideration

Subject to the limitations described in the next paragraph, the following discussion summarizes the material U.S. federal income tax consequences to a “U.S. Holder” arising from the purchase, ownership and sale of our Ordinary Shares. For this purpose, a “U.S. Holder” is a holder of Ordinary Shares that is: (1) an individual citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under U.S. federal income tax laws; (2) a corporation (or entity treated as a corporation for U.S. federal income tax purposes) or a partnership (other than a partnership that is not treated as a U.S. person under any applicable U.S. Treasury Regulations) created or organized under the laws of the United States or the District of Columbia or any political subdivision thereof; (3) an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of source; (4) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust; (5) a trust that has a valid election in effect to be treated as a U.S. person to the extent provided in U.S. Treasury regulations; or (6) any person otherwise subject to U.S. federal income tax on a net income basis in respect of our Ordinary Shares, if such status as a U.S. Holder is not overridden pursuant to the provisions of an applicable tax treaty. This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase our Ordinary Shares. This summary generally considers only U.S. Holders that will own our Ordinary Shares as capital assets. Except to the limited extent discussed below, this summary does not consider the U.S. federal tax consequences to a person that is not a U.S. Holder, nor does it describe the rules applicable to determine a taxpayer’s status as a U.S. Holder. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, or the Code, final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, administrative and judicial interpretations thereof, and the Convention Between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income, as amended, or the U.S.—Israel Tax Treaty, all as in effect as of the date hereof and all of which are subject to change, possibly on a retroactive basis, and all of which are open to differing interpretations. The Company will not seek a ruling from the U.S. Internal Revenue Service, or the IRS, with regard to the U.S. federal income tax treatment of an investment in our Ordinary Shares by U.S Holders and, therefore, can provide no assurances that the IRS will agree with the conclusions set forth below.

This discussion does not address all of the aspects of U.S. federal income taxation that may be relevant to a particular shareholder based on such shareholder’s particular circumstances and in particular does not discuss any estate, gift, generation-skipping, transfer,

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state, local or foreign tax considerations. In addition, this discussion does not address the U.S. federal income tax treatment of a U.S. Holder who is: (1) a bank, life insurance company, regulated investment company, or other financial institution or “financial services entity”; (2) a broker or dealer in securities or foreign currency; (3) a person who acquired our Ordinary Shares in connection with employment or other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative minimum tax; (5) a U.S. Holder that holds our Ordinary Shares as a hedge or as part of a hedging, straddle, conversion or constructive sale transaction or other risk-reduction transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real estate investment trusts; (8) a U.S. Holder that expatriates out of the United States or a former long-term resident of the United States; or (9) a person having a functional currency other than the U.S. dollar. This discussion does not address the U.S. federal income tax treatment of a U.S. Holder that owns, directly or constructively, at any time, Ordinary Shares representing 10% or more of our voting power. Additionally, the U.S. federal income tax treatment of persons who hold Ordinary Shares through a partnership or other pass-through entity are not considered. Each prospective investor is advised to consult such person’s own tax advisor with respect to the specific U.S. federal and state income tax consequences to such person of purchasing, holding or disposing of our Ordinary Shares, including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws.

Distributions on Ordinary Shares

Subject to the discussion under the heading “Passive Foreign Investment Companies” below, a U.S. Holder will be required to include in gross income as ordinary income the amount of any distribution paid on Ordinary Shares (including the amount of any Israeli tax withheld on the date of the distribution), to the extent that such distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder’s tax basis for our Ordinary Shares to the extent thereof, and then capital gain.

Corporate holders generally will not be allowed a deduction for dividends received. For noncorporate U.S. Holders, to the extent that their total adjusted income does not exceed applicable thresholds, the maximum federal income tax rate for “qualified dividend income” and long-term capital gains is generally 15%. For those noncorporate U.S. Holders whose total adjusted income exceeds such income thresholds, the maximum federal income tax rate for “qualified dividend income” and long-term capital gains is generally 20%. For this purpose, “qualified dividend income” means, inter alia, dividends received from a “qualified foreign corporation.” A “qualified foreign corporation” is a corporation that is entitled to the benefits of a comprehensive tax treaty with the United States which includes an exchange of information program. The IRS has stated that the U.S.-Israel Tax Treaty satisfies this requirement and we believe we are eligible for the benefits of that treaty.

Dividends will not qualify for the preferential rate if we are treated, in the year the dividend is paid or in the prior year, as a passive foreign investment company, or PFIC. A U.S. Holder will not be entitled to the preferential rate: (i) if the U.S. Holder has not held our Ordinary Shares for at least 61 days of the 121 day period beginning on the date which is 60 days before the ex-dividend date, or (ii) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar property. Any days during which the U.S. Holder has diminished its risk of loss on our Ordinary Shares are not counted towards meeting the 61-day holding period. Finally, U.S. Holders who elect to treat the dividend income as “investment income” pursuant to Code section 163(d)(4) will not be eligible for the preferential rate of taxation. The amount of a distribution with respect to our Ordinary Shares will be measured by the amount of the fair market value of any property distributed, and for U.S. federal income tax purposes, the amount of any Israeli taxes withheld therefrom. (See discussion above under “Non-U.S. Holders of Ordinary Shares.”) Cash distributions paid by us in NIS will be included in the income of U.S. Holders at a U.S. dollar amount based upon the spot rate of exchange in effect on the date the dividend is includible in the income of the U.S. Holder, and U.S. Holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If the U.S. Holder subsequently converts the NIS, any subsequent gain or loss in respect of such NIS arising from exchange rate fluctuations will be U.S. source ordinary exchange gain or loss.

Distributions paid by us will generally be foreign source income for U.S. foreign tax credit purposes. Subject to the limitations set forth in the Code, U.S. Holders may elect to claim a foreign tax credit against their U.S. income tax liability for Israeli income tax withheld from distributions received in respect of our Ordinary Shares. In general, these rules limit the amount allowable as a foreign tax credit in any year to the amount of ordinary U.S. federal income tax for the year attributable to foreign source taxable income. This limitation on the use of foreign tax credits generally will not apply to an electing individual U.S. Holder whose creditable foreign taxes during the year do not exceed $300, or $600 for joint filers, if such individual’s gross income for the taxable year from non-U.S. sources consists solely of certain passive income. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received with respect to our Ordinary Shares if such U.S. Holder has not held our Ordinary Shares for at least 16 days out of the 31-day period beginning on the date that is 15 days before the ex-dividend date or to the extent that such U.S. Holder is under an obligation to make certain related payments with respect to substantially similar or related property. Any day during which a U.S. Holder has substantially diminished his or her risk of loss with respect to our Ordinary Shares will not count toward meeting the 16-day holding period. A U.S. Holder will also be denied a foreign tax credit if the U.S. Holder holds our Ordinary Shares in an arrangement in which the U.S. Holder’s reasonably expected economic profit is insubstantial compared to the foreign taxes expected to be paid or accrued. The rules relating to the determination of the U.S. foreign tax credit are complex, and U.S.

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Holders should consult with their own tax advisors to determine whether, and to what extent, they are entitled to such credit. U.S. Holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income taxes withheld, provided such U.S. Holders itemize their deductions.

Medicare Contribution Tax

For taxable years beginning after December 31, 2012, U.S. Holders who are individuals, estates or trusts will generally be required to pay a new 3.8% Medicare tax on their net investment income (including dividends on and gains from the sale or other disposition of our Ordinary Shares), or, in the case of estates and trusts, on their net investment income that is not distributed. In each case, the 3.8% Medicare tax applies only to the extent that the U.S. Holder’s total adjusted income exceeds applicable thresholds.

Sale, Exchange or Other Disposition

Subject to the discussion and exceptions below, a United States holder generally will recognize capital gain or loss for United States federal income tax purposes upon the sale or other disposition of the United States holder’s Ordinary Shares equal to the difference between the amount realized on the sale or other disposition and the United States holder’s tax basis in its Ordinary Shares. The capital gain or loss will be long-term capital gain or loss if the Ordinary Shares have been held for more than one year at the time of sale or other disposition. In general, gain realized by a U.S. Holder on a sale, exchange or other disposition of Ordinary Shares will generally be treated as U.S. source income for U.S. foreign tax credit purposes. A loss realized by a U.S. Holder on the sale, exchange or other disposition of Ordinary Shares is generally allocated to U.S. source income. However, U.S. Treasury Regulations require such loss to be allocated to foreign source income to the extent specified dividends were received by the taxpayer within the 24-month period preceding the date on which the taxpayer recognized the loss. The deductibility of a loss realized on the sale, exchange or other disposition of Ordinary Shares is subject to limitations.

Passive Foreign Investment Company Rules

Special U.S. federal income tax laws apply to a U.S. Holder who owns shares of a corporation that was (at any time during the U.S. Holder’s holding period) a PFIC. We would be a passive foreign investment company, or PFIC, if either:

• 75% or more of our gross income (including our pro rata share of gross income for any company, U.S. or foreign, in which we are considered to own 25% or more of the shares by value), in a taxable year is passive (the “Income Test”); or

• At least 50% of our assets, averaged over the year and generally determined based upon value (including our pro rata share of the assets of any company in which we are considered to own 25% or more of the shares by value), in a taxable year are held for the production of, or produce, passive income (the “Asset Test”).

Passive income generally consists of dividends, interest, rents, royalties, annuities and income from certain commodities transactions and from notional principal contracts. Cash is treated as generating passive income.

If we are or become a PFIC, each U.S. holder would generally, upon receipt of certain distributions by us and upon disposition of our Ordinary Shares at a gain, be liable to pay U.S. federal income tax at the then prevailing highest tax rates on ordinary income plus interest on such tax, as if the distribution or gain had been recognized ratably over the taxpayer’s holding period for the Ordinary Shares. In addition, when shares of a PFIC are acquired by reason of death from a decedent that was a U.S. holder, the tax basis of such shares would not receive a step-up to fair market value as of the date of the decedent’s death, but instead would be equal to the decedent’s basis if lower, unless all gain were recognized by the decedent. Indirect investments in a PFIC may also be subject to special U.S. federal income tax rules.

While there are U.S. federal income tax elections that sometimes can be made to mitigate these adverse tax consequences (including, without limitation, the “QEF Election” under Section 1295 of the Code and the “Mark-to-Market Election” under Section 1296 of the Code), such elections are available in limited circumstances and must be made in a timely manner.

Based upon our income, assets and activities, we believe that we are not currently, and have not been in prior years, a PFIC for U.S. federal income tax purposes. However, in light of the complexity of PFIC rules, we cannot assure you that we have not been or are not a PFIC or will avoid becoming a PFIC in the future. U.S. holders who hold Ordinary Shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC. U.S. holders are urged to consult their tax advisors about the PFIC rules, including QEF and mark-to-market elections. For those U.S. Shareholders who determine that we were a PFIC in any our taxable years and notify us in writing of their request for the information required in order to effectuate the QEF Election described above, we will promptly make such information available to them.

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Backup Withholding and Information Reporting

Dividends on our Ordinary Shares, and payments of the proceeds of a sale of our Ordinary Shares, paid within the United States or through certain United States-related financial intermediaries are subject to information reporting and may be subject to backup withholding (at a rate of 28%) unless (i) the payer is entitled to, and does in fact, presume the United States holder of our Ordinary Shares is a corporation or other exempt recipient or (ii) the United States holder provides a taxpayer identification number on a properly completed Form W-9 and certifies that no loss of exemption from backup withholding has occurred. The amount of any backup withholding will be allowed as a credit against a United States holder’s United States federal income tax liability and may entitle that United States holder to a refund, provided that required information is furnished to the Internal Revenue Service.

Under the Hiring Incentives to Restore Employment Act of 2010 (to which we refer as the HIRE Act), some payments to “foreign financial institutions” in respect of accounts of U.S. shareholders at such financial institutions may be subject to withholding at a rate of 30%. Treasury regulations provide that such withholding will only apply to distributions paid on or after July 1, 2014, and to other “withholdable payments” (including payments of gross proceeds from a sale or other disposition of our Ordinary Shares) made on or after January 1, 2017. U.S. Holders should consult their tax advisors regarding the effect, if any, of the HIRE Act on their ownership and disposition of our Ordinary Shares. See “Non-U.S. Holders of Ordinary Shares.”

Non-U.S. Holders of Ordinary Shares

Except as provided below, an individual, corporation, estate or trust that is not a U.S. Holder generally will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our Ordinary Shares. A non-U.S. Holder may be subject to U.S. federal income or withholding tax on a dividend paid on our Ordinary Shares or the proceeds from the disposition of our Ordinary Shares if: (1) such item is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States or, in the case of a non-U.S. Holder that is a resident of a country which has an income tax treaty with the United States, such item is attributable to a permanent establishment or, in the case of gain realized by an individual non-U.S. Holder, a fixed place of business in the United States; (2) in the case of a disposition of our Ordinary Shares, the individual non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale and other specified conditions are met; (3) the non-U.S. Holder is subject to U.S. federal income tax pursuant to the provisions of the U.S. tax law applicable to U.S. expatriates. In general, non-U.S. Holders will not be subject to backup withholding with respect to the payment of dividends on our Ordinary Shares if payment is made through a paying agent, or office of a foreign broker outside the United States. However, if payment is made in the United States or by a U.S. related person, non-U.S. Holders may be subject to backup withholding, unless the non-U.S. Holder provides an applicable Form W-8 (or a substantially similar form) certifying to its foreign status or otherwise establishes an exemption. A U.S. related person for these purposes is a person with one or more current relationships with the United States.

The amount of any backup withholding from a payment to a non-U.S. Holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.

The HIRE Act may impose withholding taxes on some types of payments made to “foreign financial institutions” and some other non-U.S. entities. Under the HIRE Act, the failure to comply with additional certification, information reporting and other specified requirements could result in withholding tax being imposed on payments of dividends and sales proceeds to U.S. Holders that own Ordinary Shares through foreign accounts or foreign intermediaries and specified non-U.S. Holders. The HIRE Act imposes a 30% withholding tax on dividends on, and gross proceeds from the sale or other disposition of, Ordinary Shares paid from the United States to a foreign financial institution or to a foreign nonfinancial entity, unless (i) the foreign financial institution undertakes specified diligence and reporting obligations or (ii) the foreign nonfinancial entity either certifies it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner. In addition, if the payee is a foreign financial institution, it generally must enter into an agreement with the U.S. Treasury that requires, among other things, that it undertake to identify accounts held by specified U.S. persons or U.S.-owned foreign entities, annually report certain information about such accounts, and withhold 30% on payments to other specified account holders. Treasury regulations provide that such withholding will only apply to distributions paid on or after July 1, 2014, and to other “withholdable payments” (including payments of gross proceeds from a sale or other disposition of our Ordinary Shares) made on or after January 1, 2017. You should consult your tax advisor regarding the HIRE Act.

Israeli Taxation and Investment Programs

Our results of operations are significantly impacted by the Israeli tax scheme to which we are subject and the Israeli tax benefits for which we qualify. The following is a summary of the current tax law applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of government programs from which we benefit. To the extent that the discussion is based on tax legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities in question. Israeli companies were generally subject to corporate tax at the rate of 25% on their taxable income for 2013 tax year. The corporate tax rate was increased to 26.5% for 2014

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and thereafter. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise, as discussed further below, may be considerably less. See “Law for the Encouragement of Capital Investments” in this Item 10 below. Beginning as of 2010, Israeli companies are subject to regular corporate tax rate on their capital gains.

Besides being subject to the general corporate tax rules in Israel, we have also, from time to time, applied for and received certain grants and tax benefits from, and participate in, programs sponsored by the Government of Israel, as described below.

Law for the Encouragement of Capital Investments, 5719-1959

The Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, provides certain incentives for capital investments in a production facility (or other eligible assets).

The Investment Law has been amended several times over the last years, with the two most significant changes effective as of April 1, 2005 (which we refer to as the 2005 Amendment), and as of January 1, 2011 (which we refer to as the 2011 Amendment). Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended Investment Law. Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the Investment Law prior to the 2011 Amendment, yet companies entitled to benefits under the Investment Law as in effect up to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead irrevocably to forego such benefits and elect the benefits of the 2011 Amendment.

The following discussion is a summary of the Investment Law prior to its amendments as well as the relevant changes contained in the new legislation.

Tax benefits for Approved Enterprises approved before April 1, 2005

Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, referred to as an “Approved Enterprise”, is entitled to certain benefits. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the location of the facility in which the investment is made or the election of the grantee. An approval from the Investment Center of the Israeli Ministry of Economy (formerly the Ministry of Industry and Trade), or the Investment Center, must be received in order to obtain an Approved Enterprise status. Each certificate of approval for an Approved Enterprise relates to a specific investment program that is defined both by the financial scope of the investment, including sources of funds, and by the physical characteristics of the facility or other assets. The tax benefits available under any certificate of approval relate only to taxable income attributable to the specific program and are contingent upon meeting the criteria set out in the certificate of approval.

An Approved Enterprise may elect to forego any entitlement to the grants otherwise available under the Investment Law and, instead, participate in an alternative benefits program. Under the alternative benefits program, a company’s undistributed income derived from an Approved Enterprise will be exempt from corporate tax for a period of between two and ten years from the first year of taxable income, depending upon the geographic location in Israel of the Approved Enterprise. The benefits commence on the date in which that taxable income is first earned. Upon expiration of the exemption period, the Approved Enterprise is eligible for the reduced tax rates otherwise applicable under the Investment Law for any remainder of the otherwise applicable benefits period. The benefits period under Approved Enterprise status is limited to 12 years from the year the enterprise commences its operations, or 14 years from the year of the approval as an Approved Enterprise, whichever ends earlier. If a company has more than one Approved Enterprise program or if only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates. The tax benefits from any certificate of approval relate only to taxable income attributable to the specific Approved Enterprise. Income derived from activity that is not integral to the activity of the Approved Enterprise will not enjoy tax benefits.

A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors’ Company, or FIC. An FIC eligible for benefits is essentially a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether or not a company qualifies as an FIC is made on an annual basis. An FIC that has an Approved Enterprise program will be eligible for an extension of the period during which it is entitled to tax benefits under its Approved Enterprise status (so that the benefits period may be up to ten years) and for further tax benefits if the level of foreign investment exceeds 49%. If a company that has an Approved Enterprise program is a wholly owned subsidiary of another company, then the percentage of foreign investment is determined based on the percentage of foreign investment in the parent company.

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The corporate tax rates and related levels of foreign investments with respect to an FIC that has an Approved Enterprise program are set forth in the following table:

Percentage of non-Israeli ownership	Corporate Tax Rate
Over 25% but less than 49%		25	%
49% or more but less than 74%		20	%
74% or more but less than 90%		15	%
90% or more		10	%

A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from the portion of its facilities that have been granted Approved Enterprise status during the tax exemption period will be subject to tax in respect of the amount of dividend distributed (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate that would have been otherwise applicable if such income had not been tax-exempted under the alternative benefits program. This rate generally ranges from 10% to 25%, depending on the extent to which non-Israeli shareholders hold such company’s shares. Such company may also be required to record a deferred tax liability with respect to such tax-exempt income prior to its distribution.

In addition, dividends paid out of income attributed to an Approved Enterprise (or out of dividends received from a company whose income is attributed to an Approved Enterprise) are generally subject to withholding tax at the rate of 15%, or at a lower rate provided under an applicable tax treaty. The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 30%, or at a lower rate under an applicable tax treaty. In the case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply.

The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program. This benefit is an incentive granted by the Israeli government regardless of whether the alternative benefits program is elected.

The benefits available to an Approved Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval with respect thereto, as described above. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, adjusted to the Israeli consumer price index and interest.

Our third Approved Enterprise program under the Investment Law, before the 2005 Amendment, which was approved in April 1998 and which entitled us to some tax benefits, subject to certain conditions, expired in April 2012. Our production facilities had, in the past, been granted “Approved Enterprise” status under the Investment Law, for two additional investment programs, which were approved in February 1989 and March 1995, but which had subsequently expired.

Because we currently have no taxable income, the benefits from our April 1998 Approved Enterprise program were not utilized prior to the program’s expiration in April 2012. Income derived from this program, for which we had elected the Alternative Benefits Program, was to be exempted from tax for a period of ten years, starting in the first year in which we generate taxable income from the Approved Enterprise, subject to a condition that we would have a certain minimum number of professional employees. We did not meet this condition and since the status of Approved Enterprise has expired for this investment program, we are not entitled to any future benefits under this investment program or any other investment program.

The termination or reduction of these tax benefits would likely increase our tax liability. The amount, if any, by which our taxes would increase will depend upon the rate of the tax increase, the amount of any tax benefit reduction to which we would have been entitled, the amount of any taxable income that we may earn, and the amount of accumulated losses for income tax purposes that we may carry forward from previous years.

Tax benefits under the 2005 Amendment that became effective on April 1, 2005.

The 2005 Amendment applies to new investment programs and investment programs commencing after 2004, and does not apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval. Pursuant to the 2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to qualifying investments. The 2005 Amendment, however, limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of a facility as an Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s income is derived from export.

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An enterprise that qualifies under the new provisions is referred to as a Benefited Enterprise, rather than Approved Enterprise. The 2005 Amendment provides that the approval of the Investment Center is required only for Approved Enterprises that receive cash grants. As a result, a company is no longer required to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternative benefits program. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. A company that has a Benefited Enterprise may, at its discretion, approach the Israel Tax Authority for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law.

Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities) that derive more than 25% of their business income from export to specific markets with a population of at least 12 million (and from January 1, 2012, 14 million). In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets all the conditions set forth in the amendment for tax benefits and which exceeds a minimum amount specified in the Investment Law. Such investment entitles a company to a Benefited Enterprise status with respect to the investment, and may be made over a period of no more than three years from the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise. Where a company requests to have the tax benefits apply to an expansion of existing facilities, only the expansion will be considered to be a Benefited Enterprise, and the company’s effective tax rate will be the weighted average of the applicable rates. In such case, the minimum investment required in order to qualify as a Benefited Enterprise must exceed a certain percentage of the value of the company’s production assets before the expansion.

The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise depends on, among other things, the geographic location of the Benefited Enterprise. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the Benefited Enterprise in Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year, as explained above.

Dividends paid out of income attributed to a Benefited Enterprise (or out of dividends received from a company whose income is attributed to a Benefited Enterprise) are generally subject to withholding tax at the rate of 15% or such lower rate as may be provided in an applicable tax treaty. The reduced rate of 15% is limited to dividends and distributions out of income attributed to a Benefited Enterprise during the benefits period and actually paid at any time up to 12 years thereafter, except with respect to an FIC, in which case the 12-year limit does not apply. Furthermore, a company qualifying for tax benefits under the 2005 Amendment which pays a dividend out of income attributed to its Benefited Enterprise during the tax exemption period will be subject to tax in respect of the amount of the dividend distributed (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate that would have otherwise been applicable (i.e. 25%, or lower in the case of an FIC which is at least 49% owned by non-Israeli residents). Such company may also be required to record a deferred tax liability with respect to such tax-exempt income prior to its distribution.

The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, adjusted to the consumer price index and interest, or other monetary penalty.

Tax benefits under the 2011 Amendment that became effective on January 1, 2011.

The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such terms are defined in the Investment Law) as of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which is not wholly owned by a governmental entity or (ii) a limited partnership that (a) was registered under the Israeli Partnerships Ordinance and (b) all of its limited partners are companies incorporated in Israel, but not all of them are governmental entities; which has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its preferred income attributed to its Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise is located in a certain development zone, in which case the rate will be 10%. Such corporate tax rate was reduced to 12.5% and 7%, respectively, in 2013 and is increased to 16% and 9%, respectively, in 2014 and thereafter. Income derived by a Preferred Company from a ‘Special Preferred Enterprise’ (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rate of 8%, or to 5% if the Special Preferred Enterprise is located in a certain development zone.

Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 15% (20% with respect to dividends to be distributed on or after January 1, 2014) or such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although upon a subsequent distribution of such dividend to individuals or a non-Israeli company, withholding tax at the rate of 15% (20% with respect to dividends to be distributed on or after January 1, 2014) or such lower rate as may be provided in an applicable tax treaty, will apply).

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The 2011 Amendment also provided transitional provisions to address companies already enjoying current benefits, under the Investment Law. These transitional provisions provide, among other things, that unless an irrevocably request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, which chose to receive grants, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions ; (ii) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, that had participated in an alternative benefits program, before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a Benefited Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment became effective, provided that certain conditions are met.

November 2012 Amendment

Pursuant to a recent amendment to the Investment Law which became effective on November 12, 2012, a company that elects by November 11, 2013 to pay a reduced corporate tax rate as set forth in that amendment (rather than the regular corporate tax rate applicable to an Approved Enterprise\Benefited Enterprise earnings) with respect to undistributed exempt earnings accumulated by the company until December 31, 2011 will be entitled to distribute dividends from such earnings without being required to pay additional corporate tax with respect to such dividends. A company that has so elected must make certain qualified investments in Israel over the five-year period commencing in the year of such election. A company that has elected to apply the amendment cannot withdraw from its election.

Tax Benefits of Research and Development

Israeli tax law allows, under certain conditions, a tax deduction for research and development expenditures, including capital expenditures, for the year in which they are incurred. Such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeli government ministry, determined by the field of research, and the research and development must be for the promotion or development of the company. Furthermore, the research and development must be carried out by, or on behalf of, the company seeking such tax deduction. The amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not approved by the relevant Israeli government ministry, but otherwise qualifying for deduction, are deductible over a three-year period. However, the amounts of any government grants made available are subtracted from the amount of the deductible expenses.

The OCS has approved some of our research and development programs prior to 2004 and we have been able to deduct in the past, for tax purposes, a portion of our research and development expenses net of grants received from the OCS. Since 2004, all of our research and development expenses in Israel have been deducted for tax purpose over a 3-year period.

Capital Gains Tax on Sales of Our Ordinary Shares

Israeli law generally imposes a capital gain tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares of Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Israeli law distinguishes between real capital gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The real capital gain is the excess of the total capital gain over the inflationary surplus.

Generally, as of January 1, 2012, the tax rate applicable to real capital gain derived by Israeli individuals from the sale of shares purchased on or after January 1, 2003, whether or not listed on a stock exchange, is 25%, unless such shareholder claims a deduction for interest and linkage differentials expenses in connection with the purchase and holding of such shares, in which case the gain will generally be taxed at a rate of 30%. Additionally, if such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly, alone or together with another, 10% or more of any of the company’s means of control (including, inter-alia, the right to receive company profits, voting rights, the right to receive the company’s liquidation proceeds and the right to appoint a company director), the tax rate shall be 30%. However, the foregoing tax rates do not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement). Israeli companies are currently subject to the Corporate Tax rate on capital gain derived from the sale of listed shares (as described above, the corporate tax rate was 25% in 2013 and from 2014 and onwards is 26.5%).

As of January 1, 2013, individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 2% on annual income exceeding NIS 811,560 for 2014, which amount is linked to the annual change in the Israeli consumer price index. For this purpose taxable income will include, but not limited to, and subject to the provisions of an applicable tax treaty, capital gain from the sale of our shares and taxable income from dividend distributions.

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The tax basis of shares acquired prior to January 1, 2003 will generally be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.

Non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital gain tax on any gains derived from the sale, exchange or disposition of shares of Israeli companies publicly traded on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of Israel provided,inter-alia, that (i) such gains are not derived through a permanent establishment that the non-Israeli resident maintains in Israel, (ii) the shares were purchased after being listed on a recognized stock exchange, and (iii) with respect to shares listed on a recognized stock exchange outside of Israel, such shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments)5745-1985. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Furthermore, such an exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.

In some instances, whether or not our shareholders are liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form of a merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non Israeli resident, and, in the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.

Pursuant to the Convention Between the Government of the United States of America and the government of Israel with Respect to Taxes on Income, as amended, or the U.S.-Israel Tax Treaty, the sale, exchange or disposition of shares of an Israeli company by a person who (i) holds the shares as a capital asset, (ii) qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli capital gain tax. Such exemption will not apply if (i) such U.S.-Israel Tax Treaty shareholder holds, directly or indirectly, shares representing 10% or more of our voting rights during any part of the 12-month period preceding such sale, exchange or disposition, subject to certain conditions, or (ii) the capital gain from such sale, exchange or disposition can be attributed to a permanent establishment of such shareholder maintained in Israel, or (iii) the shareholder, if an individual, has been present in Israel for a period or periods aggregating to 183 days or more during the applicable taxable year. In each case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not apply to U.S. state or local taxes.

Taxation of Dividends paid to Holders of Our Shares

Israeli residents

Israeli resident individuals are generally subject to Israeli income tax on the receipt of dividends paid on our Ordinary Shares at 25%, or 30% if the dividend recipient is a substantial shareholder, at the time of distribution or at any time during the preceding 12-month period. However, dividends distributed from taxable income accrued during the benefits period of an Approved Enterprise or a Benefited Enterprise are subject to withholding tax at the rate of 15% (and 20% with respect to Preferred Enterprise), subject to certain conditions. An average rate will be set in case the dividend is distributed from mixed types of income (regular and Approved/ Benefited/ Preferred income).

Israeli resident corporations are generally exempt from Israeli corporate tax on the receipt of dividends paid on shares of Israeli resident corporations. However, dividends distributed from taxable income accrued during the benefits period of an Approved Enterprise or Benefited Enterprise are subject to withholding tax at the rate of 15%, if the dividend is distributed during the tax benefits period under the Investment Law or within 12 years after such period.

Non-residents of Israel

Non-residents of Israel (either individuals or corporations) are generally subject to Israeli income tax on income accrued or derived from sources in Israel. Such sources of income include passive income such as dividends. On distributions of dividends, income tax is applicable at the rate of 25%, or 30% (for a shareholder that is considered a “significant shareholder” at any time during the 12-month period preceding such distribution), unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence, however withholding tax will apply in any case. Dividends paid on publicly traded shares, like our Ordinary Shares, to non-

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Israeli residents, although subject to the same tax rates applicable to dividends paid for non-publicly traded shares, are generally subject to Israeli withholding tax at a rate of 25%, so long as the shares are registered with a Nominee Company (whether the recipient is a substantial shareholder or not), unless a different rate is provided under an applicable tax treaty. However, under the Investments Law, dividends distributed from income attributed to an Approved Enterprise or a Benefited Enterprise, are taxed at the rate of 15% (and 20% with respect to a Preferred Enterprise).

Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of shares who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25%. However, if the income out of which the dividend is paid is not generated by an Approved Enterprise, Benefited Enterprise or Preferred Enterprise, and not more than 25% of our gross income consists of interest or dividends, dividends paid to a U.S. corporation holding at least 10% of our issued voting power during the part of the tax year which precedes the date of payment of the dividend and during the whole of its prior tax year, are generally taxed at a rate of 12.5%. Dividends generated by an Approved Enterprise, Benefited Enterprise or Preferred Enterprise, are taxed at the rate of 15% under the U.S.-Israel Tax Treaty for such a U.S. corporate shareholder, provided that the condition related to the gross income for the previous year (as set forth in the previous sentence) is met.

If the dividend is attributable partly to income derived from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S. residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for Untied States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in United States tax legislation.

A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel in respect of such income, provided that (i) such income was not derived from a business conducted in Israel by the taxpayer, and (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.

For information with respect to the applicability of Israeli capital gains taxes on the sale of Ordinary Shares by United States residents, see above “— Capital Gains Tax on Sales of Our Ordinary Shares.”

Documents on Display

We are subject to the informational requirements of the Exchange Act. In accordance with these requirements, we are required to file reports and other information with the SEC. You may read and copy these materials, including this annual report and the accompanying exhibits and reports and other information that we have previously filed, at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling 1(800)-SEC-0330. The SEC maintains an Internet Site at http://www.sec.gov that contains reports and other information that we file electronically. In addition, documents referred to in this annual report may be inspected at our offices located at 8 HaMarpe Street, Science Based Industries Campus, Har Hotzvim, Jerusalem, Israel 91450.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

Exchange Rate Risks

Revenues generated and costs incurred outside of the United States are generally denominated in non-dollar currencies. Costs not effectively denominated in United States dollars are remeasured to United States dollars, when recorded, at the prevailing exchange rates for the purposes of our financial statements. Consequently, fluctuations in the rates of exchange between the dollar and non-dollar currencies will affect our results of operations. An increase in the value of a particular currency relative to the dollar will increase the dollar reporting value for transactions in that particular currency, and a decrease in the value of that currency relative to the dollar will decrease the dollar reporting value for those transactions. This effect on the dollar reporting value for transactions is generally only partially offset by the impact that currency fluctuations may have on costs. We do not generally engage in currency hedging transactions to offset the risks associated with variations in currency exchange rates. Consequently, significant foreign currency fluctuations and other foreign exchange risks may have a material adverse effect on our business, financial condition and results of operations. Since our revenues are generated in United States dollars and currencies other than United States dollars, and a substantial portion of our expenses are incurred and will continue to be incurred in NIS, we are exposed to risk that the NIS may appreciate relative to the U.S. dollar, or that even if the NIS devaluates in relation to the U.S. dollar, that the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar or that the timing of such devaluation will lag behind inflation in Israel. We do not engage in any hedging or other transactions intended to manage risks relating to foreign currency exchange rate or interest rate fluctuations. We also do not own any market risk sensitive instruments. However, we may in the future undertake hedging or other transactions or invest in market risk sensitive instruments if we determine that it is necessary to offset these risks.

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In 2013, 93% of our revenues and 73% of our expenses were denominated in U.S. dollars. The net effect of the change in value of the U.S. dollar against the NIS in 2013 on our expenses (excluding financial expenses) was reducing cost of revenues by approximately $0.08 million and operating expenses by $0.09 million. The net effect of changes in currency value on our revenues was immaterial.

The net effect of the above-described risks stemming from currency exchange rate fluctuations on our operating results can be further quantified in a hypothetical manner as follows:

An increase of 10% in the value of the NIS relative to the dollar in the year ended December 31, 2013 would have resulted in a net decrease in the dollar reporting value of our operating income of approximately $127,000, due to the adverse impact to our operating margins that we would experience as a result of such an increase. On the other hand, a 10% decrease in value of the NIS relative to the dollar in the year ended December 31, 2013 would have caused a net increase in the dollar reporting value of our operating income of approximately $127,000 for 2013, due to the favorable effect on our operating margins that would result from such devaluation of the NIS.

In addition, we have a balance sheet exposure arising from assets and liabilities denominated in NIS. Any change of the exchange rates between the U.S. dollar and the NIS may create financial gain or loss. In 2013 the net effect of the change in value of the U.S. dollar against the NIS resulting from balance sheet exposure was an increase in financial expenses of approximately $128,000.

The net effect on our balance sheet of our currency exchange rate fluctuation exposure can be further quantified in a hypothetical manner as follows:

An instantaneous 10% depreciation in the NIS from their levels against the dollar as of December 31, 2013, with all other variables held constant, would decrease the fair value of our assets denominated in NIS, held at December 31, 2013, by approximately $0.12 million and decrease the fair value of our liabilities denominated in NIS, held at December 31, 2013, by approximately $0.3 million, thereby causing a net increase in our shareholders’ equity of $0.18 million. On the other hand, an instantaneous 10% appreciation in the NIS from its level against the dollar as of December 31, 2013, with all other variables held constant, would increase the fair value of our assets denominated in NIS, held at December 31, 2013, by approximately $0.12 million and increase the fair value of our liabilities denominated in NIS, held at December 31, 2013, by approximately $0.30 million, thereby causing a net decrease in our shareholders’ equity of $0.18 million.

Interest Rate Risks

During the year ended 2013, we had long-term bank loans range between $1.1 million at the beginning of the year and $0.65 million (including current maturities) at the end of the year that were subject to variable interest rates adjustable in accordance with LIBOR and the Israeli prime rate. Any significant increase in LIBOR and the Israeli prime rate may have an adverse effect on our financial expenses and financial condition. Our exposure to fluctuations in LIBOR can be quantified as follows:

An increase in LIBOR and Israeli prime rate each by three hundred (300) basis points over the course of the entirety of the year ended December 31, 2013 would have increased our financial expense related to our long-term bank loans by approximately $30,000.

Item 12. Description Of Securities Other Than Equity Securities

Not applicable.

PART II

Item 13. Defaults, Dividend Arrearages And Delinquencies

None.

Item 14. Material Modifications To The Rights Of Security Holders And Use Of Proceeds

Not applicable.

Item 15. Controls and Procedures

(a)Disclosure Controls and Procedures. Our management, with the participation of the Executive Chairman of our board of directors (who serves as our co-principal executive officer), our Chief Executive Officer (who serves as our co-principal executive officer), and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2013. Based on this evaluation, those officers have concluded that, as of December 31, 2013, our disclosure controls and procedures were effective.

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(b)Management’s Annual Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management, with the participation of the Executive Chairman of our board of directors (who serves as our co-principal executive officer), our Chief Executive Officer (who serves as our co-principal executive officer), and our Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2013 based on the criteria set forth in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with general accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on that assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2013.

(c) Attestation Report of the Registered Public Accounting Firm. Not applicable.

(d) Changes in Internal Control Over Financial Reporting.

Based on the evaluation conducted by it, with the participation of the Executive Chairman of our board of directors (who serves as our co-principal executive officer), our Chief Executive Officer (who serves as our co-principal executive officer) and our Chief Financial Officer, pursuant to Rules 13a-15(d) and 15d-15(d) promulgated under the Exchange Act, our management (including such officers) has concluded that there has been no change in our internal control over financial reporting that occurred during 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16. Reserved

Item 16A. Audit Committee Financial Expert

Our board of directors has determined that we have at least one audit committee financial expert, Mr. Arie Ovadia, who serves on the audit committee of our board of directors. Mr. Ovadia also qualifies as an independent director, as defined under the Listing Rules of the NASDAQ Stock Market.

Item 16B. Code of Ethics

We have in place a Code of Ethics that applies to all of our (and our subsidiaries’) directors, executive officers and employees, including our principal executive officers, principal financial officer and principal accounting officer or controller (or persons performing similar functions). Our Code of Ethics constitutes a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder, and Item 16B of SEC Form 20-F. The full text of the Code of Ethics is available on our website,www.viryanet.com/company/investors or you may request a copy of our Code of Ethics, at no cost, by writing to us or calling us as follows:

ViryaNet, Inc.

112 Turnpike Road

Westborough, MA 01581

Telephone: 508-490-8600

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Item 16C. Principal Accountant Fees and Services

The following table sets forth, for the years ended December 31, 2012 and 2013, the fees billed (or contracted for billing and expected to be billed) to us and our subsidiaries by our principal accountants:⁽¹⁾

	Year ended December 31,
	2013		2012
Audit fees(2)	$	67,700	$	66,000
Audit-related fees(3)		—		—
Tax fees(4)		15,000		10,000
All other fees(5)		—		—
Total	$	82,700	$	76,000

(1) Comprises fees billed (or contracted for billing and expected to be billed) by: (i) Arik Eshel, CPA & Assoc., PC., or Arik Eshel, with respect of its review of our interim financial statements for the first two fiscal quarters of 2012, as described with respect to “Audit fees” below); and (ii) Yehezkel CPA, LLC, an independent registered public accounting firm, or Yehezkel, with respect to the year ended December 31, 2012 (and review of our interim financial statements for the third quarter of 2012).

(2) Audit fees consist of fees for professional services rendered by our respective principal accountants in connection with the audit of our consolidated annual financial statements and review of our interim financial statements, and related services that would normally be provided by our principal accountants in connection with statutory and regulatory filings or engagements. For 2012, these fees amounted to $66,000, out of which: (i) $52,000 related to professional services rendered by Yehezkel in connection with its audit of our financial statements for that fiscal year and its review of our interim financial statements for the third fiscal quarter of that fiscal year; and (ii) $14,000 related to professional services rendered by Arik Eshel in connection with its review of our interim financial statements for the first two fiscal quarters of that fiscal year. For 2013, 67,700 related to professional services rendered by Yehezkel in connection with its audit of our financial statements for that fiscal year and its review of our interim financial statements for the first three fiscal quarters of that fiscal year;

(3) Audit-related fees are fees for assurance and related services rendered by our respective principal accountants that are reasonably related to the performance of their audit of our financial statements and that are not reported under “Audit-fees” above. We did not incur any such fees in either 2013 or 2012.

(4) Tax fees are fees for services rendered by our respective principal accountants in connection with tax compliance.

(5) All other fees consist of fees for products or services rendered to us by our independent public accountants other than the Audit Fees and Tax Fees described above. We did not incur any such fees in either 2013 or 2012.

Pre-Approval Policies for Non-Audit Services

Each year, the engagement of our independent auditors is approved by the audit committee of our board of directors and by the vote of our shareholders at our annual general meeting of shareholders. Our audit committee has also adopted its own rules of procedure. The audit committee’s rules of procedure provide for the prior approval of all services, including non-audit services, to be performed by our independent auditors for us over the course of the year, specifying the particular services that may be performed. All such services for 2013 and 2012 were pre-approved by the audit committee in accordance with these procedures.

Item 16D. Exemption From The Listing Standards For Audit Committees

Not applicable.

Item 16E. Purchases of Equity Securities By The Issuer And Affiliated Purchasers

Not applicable.

Item 16F. Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G. Corporate Governance

Not applicable.

Item 16H. Mine Safety Disclosure

Not applicable.

PART III

Item 17. Financial Statements

We have elected to provide financial statements and related information pursuant to Item 18.

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Item 18. Financial Statements

See the Index to Consolidated Financial Statements and related Financial Statements accompanying this annual report, beginning on page F-1.

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Item 19. Exhibits

Exhibit Number	Description of Document	Location of Document
1.1	Memorandum of Association of the Company (English translation) dated March 8, 1988	Filed as Exhibit 3.1 to the Company’s Registration Statement on Form F-1, SEC File No. 333-42158, and incorporated herein by reference.
1.2	Amended Articles of Association of the Company	Filed as Exhibit 4(a)(26) to the Company’s annual report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference.
4.1	Letter dated December 22, 2005 between the Company and Bank Hapoalim Ltd.	Translated from the Hebrew original. Filed as Exhibit 4(a)(23) to the Company’s annual report on Form 20-F for the year ended December 31, 2005 and incorporated herein by reference.
4.2	Letter dated August 29, 2007, between the Company and Bank Hapoalim Ltd.	Translated from the Hebrew original. Filed as Exhibit 4(a)(26) to the Company’s annual report on Form 20-F for the year ended December 31, 2006 and incorporated herein by reference.
4.3	Purchase Agreement, and Amended and Restated Notes dated August 5, 2005 by and between the Company and LibertyView Special Opportunities Fund LP, and exhibits thereto	Filed as Exhibit 4(a)(21) to the Company’s annual report on Form 20-F for the year ended December 31, 2005 and incorporated herein by reference.
4.4	Equity and Convertible Note Financing Agreements dated December 19, 2007 by and among the Company and the investors identified in such agreements, and exhibits thereto	Filed as Exhibit 4(a)(27) to the Company’s annual report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference.
4.5	A new Lease agreement reducing the current Company premises leased in Jerusalem, Israel, to an area of approximately 7,600 square feet of office space, dated February 25, 2002 (as summarized and translated into English).	Filed as Exhibit 4(a) to the Company’s annual report on Form 20-F for the year ending December 31, 2001 and incorporated herein by reference.
4.6	Lease for approximately 6,000 square feet of office space in Jerusalem, Israel	Filed as Exhibit 4.12.3 to the Company’s annual report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference.
4.7	Lease for approximately 13,807 square feet in Southborough, Massachusetts.	Filed as Exhibit 10.15 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
4.8	Second Amendment and Extension of Lease for approximately 10,000 square feet of office space in Southborough, Massachusetts	Filed as Exhibit 4(a)(29) to the Company’s annual report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference.
4.9	Form of Indemnification Agreement entered into with directors and officers of the Company.	Filed as Exhibit 10.16 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
4.11	The Company’s 2005 International Share Option and Restricted Share Plan. and Israeli Share Option and Restricted Share Plan	Filed as Exhibit 4(c)(8) to the Company’s annual report on Form 20-F for the year ended December 31, 2005 and incorporated herein by reference.
4.12	Lease for approximately 10,372 square feet in Westborough, Massachusetts	Filed as Exhibit 4.12 to the Company’s annual report on Form 20-F for the year ended December 31, 2010 and incorporated herein by reference.
4.13	Share Purchase Agreement dated as of June 30, 2011, by and Between the Company and Jerusalem Technology Investments Ltd.	Filed as Exhibit 4.12 to the Company’s annual report on Form 20-F for the year ended December 31, 2010 and incorporated herein by reference.

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Exhibit Number	Description of Document	Location of Document
4.14	Loan agreement with Bank Hapoalim dated December 18, 2011	Filed as Exhibit 4.14 to the Company’s annual report on Form 20-F for the year ended December 31, 2011 and incorporated herein by reference.
4.15	Loan agreements with Bank Otsar Ha-Hayal dated July 6, 2011 and September 6, 2011	Filed as Exhibit 4.15 to the Company’s annual report on Form 20-F for the year ended December 31, 2011 and incorporated herein by reference.
4.16	Agreement with LibertyView Opportunities Fund Dated July 18, 2012	Filed as Exhibit 4.16 to the Company’s annual report on Form 20-F for the year ended December 31, 2012 and incorporated herein by reference.
4.17	Letter dated January 20, 2013 between the Company and Bank Hapoalim regarding cancellation of covenants	Filed as Exhibit 4.17 to the Company’s annual report on Form 20-F for the year ended December 31, 2012 and incorporated herein by reference.
4.18	Agreement and Plan of Merger by and among Verisae, Inc., a Minnesota corporation (“Parent”), Viking Acquisition Ltd., a company organized under the laws of the State of Israel and a wholly-owned subsidiary of Parent, and the Company	Furnished as Appendix A to the Company’s proxy statement for its extraordinary general meeting of shareholders, attached to the Company’s Report of Foreign Private Issuer on Form 6-K, furnished to the SEC on July 1, 2014 and incorporated herein by reference.
4.19	Letter dated June 17, 2014 between the Company and Mercantile-Discount Bank	Filed herewith
4.20	Letter dated July 2, 2014 between the Company and Mercantile-Discount Bank	Filed herewith
12.1	Certification of Chief Executive Officer (serving as co-principal executive officer) pursuant to Rule 13a-14(a)/ Rule 15d-14(a) under the Exchange Act	Filed herewith
12.2	Certification of Executive Chairman (serving as co-principal executive officer) pursuant to Rule 13a-14(a)/ Rule 15d-14(a) under the Exchange Act	Filed herewith
12.3	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act	Filed herewith
13	Certification of Chief Executive Officer, Executive Chairman and Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350	Filed herewith
15.1	Consent of Yehezkel CPA LLC	Filed herewith
15.2	Consent of Arik Eshel, CPA & Assoc., PC	Filed herewith
101	The following financial information from ViryaNet Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2013 and 2012; (ii) Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011; (iii) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.	Filed herewith

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SIGNATURES

The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

VIRYANET LTD.
By:	/S/    MEMY ISH-SHALOM
	Memy Ish-Shalom President and Chief Executive Officer

Date: July 3, 2014

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VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2013

IN U.S. DOLLARS

INDEX

	Page
Report of Independent Registered Public Accounting Firms		F-2-F-3
Consolidated Balance Sheets		F-4
Consolidated Statements of Operations		F-5
Consolidated Statements of Changes in Shareholders’ Equity		F-6-F-8
Consolidated Statements of Cash Flows		F-9-F-10
Notes to Consolidated Financial Statements		F-11-F-33

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of VIRYANET LTD.

We have audited the accompanying consolidated balance sheets of ViryaNet Ltd. and its subsidiaries (collectively, the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of the Company for the year ended December 31, 2011 were audited by other auditors whose report, dated May 14, 2012, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit and the reports of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012 and its results of operations and cash flows for each of the two years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

Yehezkel CPA, LLC

New York, New York

July 3, 2014

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

VIRYANET LTD.

We have audited the accompanying consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows of ViryaNet Ltd. and its subsidiaries (the “Company”) for the year ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits, the consolidated financial statements referred to above present fairly, in all material respects the results of operations and cash flows of the Company for the year ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

ARIK ESHEL, CPA & ASSOCIATES., PC

New York, New York

May 14, 2012

F-3

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

	December 31,
	2013			2012
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	921		$	335
Restricted cash		183			164
Trade receivables		1,031			430
Unbilled receivables		414			252
Other accounts receivable and prepaid expenses (Note 4)		304			216
Total current assets		2,853			1,397
NON - CURRENT ASSETS:
Severance pay fund (Note 10)		1,232			1,044
Long-term receivable (Note 3)		63			125
Other		23			38
Total non - current assets		1,318			1,207
PROPERTY AND EQUIPMENT, net		48			70
GOODWILL (Note 6)		6,516			6,516
Total assets	$	10,735		$	9,190
Liabilities and shareholders’ equity
CURRENT LIABILITIES:
Short-term bank credit (Note 6)	$	171		$	160
Current maturities of long-term bank loans (Note 8)		199			646
Trade payables		525			360
Deferred revenues		3,310			2,809
Other accounts payable and accrued expenses (Note 7)		1,384			1,388
Current maturities of long-term convertible debt (Note 9)		—			352
Total current liabilities		5,589			5,715
LONG-TERM LIABILITIES:
Long-term bank loan, net of current maturities (Note 8)		453			497
Long-term convertible debt (Note 9)		—			—
Long-term deferred revenues		131			232
Long-term deferred rent payable		54			70
Accrued severance pay (Note 10)		1,567			1,374
Total long-term liabilities		2,205			2,173
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)
SHAREHOLDERS’ EQUITY(Note 12):
Share capital -
Ordinary Shares of NIS 5.0 par value - Authorized: 6,600,000 shares at December 31, 2012 and 2013; Issued and outstanding: 3,572,813 and 3,779,130 shares at December 31, 2012 and 2013, respectively		4,729			4,448
Preferred A Shares of NIS 5.0 par value - Authorized: 400,000 shares at December 31, 2012 and 2013; Issued and outstanding: 326,797 shares at December 31, 2012 and 2013. Aggregate liquidation preference of $ 2,500 at December 31, 2012 and 2013		369			369
Additional paid-in capital		116,172			116,297
Accumulated deficit		(118,329	)		(119,812	)
Total shareholders’ equity		2,941			1,302
Total liabilities and shareholders’ equity	$	10,735		$	9,190

The accompanying notes are an integral part of the consolidated financial statements.

F-4

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

U.S. dollars in thousands, except share and per share data

	Year ended December 31,
	2013			2012			2011
REVENUES (Note 14):
Software licenses	$	1,679		$	1,154		$	1,549
Maintenance and services		9,935			9,559			8,122
Total revenues		11,614			10,713			9,671
COST OF REVENUES:
Software licenses		79			122			56
Maintenance and services		3,879			4,101			3,513
Total cost of revenues		3,958			4,223			3,569
GROSS PROFIT		7,656			6,490			6,102
OPERATING EXPENSES:
Research and development		1,586			1,100			1,614
Selling and marketing		2,747			2,650			2,847
General and administrative		1,729			1,606			1,708
Total operating expenses		6,062			5,356			6,169
OPERATING INCOME (LOSS)		1,594			1,134			(67	)
OTHER INCOME (EXPENSE)
Financial expenses, net		(289	)		(196	)		(129	)
Gain on Forgiveness of debt		210			—			—
TOTAL OTHER EXPENSE, NET		(79	)		(196	)		(129	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		1,515			938			(196	)
TAXES ON INCOME (Note 13)		32			27			9
INCOME (LOSS) FROM CONTINUING OPERATIONS	$	1,483		$	911		$	(205	)
DISCONTINUED OPERATIONS:
Loss from discontinued operation net of income tax of $0		—			—			(136	)
Gain on disposal of discontinued operations net of income taxes of $0		—			—			122
NET LOSS FROM DISCONTINUED OPERATIONS		—			—			(14	)
NET INCOME (LOSS)	$	1,483		$	911		$	(219	)
BASIC NET EARNINGS (LOSS) PER SHARE
Continuing operations	$	0.36		$	0.23		$	(0.06	)
Discontinued operations		—			—			0.00
Net income (loss)	$	0.36		$	0.23		$	(0. 06	)
DILUTED NET EARNINGS (LOSS) PER SHARE
Continuing operations	$	0.33		$	0.21		$	(0.06	)
Discontinued operations		—			—			0.00
Net income (loss)	$	0.33		$	0.21		$	(0.06	)
Weighted average number of shares used in computing basic net earnings (loss) per share		4,064,298			3,896,018			3,671,547
Weighted average number of shares used in computing diluted net earnings (loss) per share		4,460,435			4,279,961			3,671,547

The accompanying notes are an integral part of the consolidated financial statements.

F-5

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. dollars in thousands, except share data

	Ordinary Shares				Preferred Shares				Additional paid-in capital			Accumulated other comprehensive			Accumulated			Total comprehensive			Total shareholders’
	Number		Amount		Number		Amount					income (loss)			deficit			income (loss)			equity
Balance as of January 1, 2011		3,235,083		3,981		326,797		369		116,456			55			(120,504	)					357
Stock based compensation		—		—		—		—		102			—			—						102
Release of restricted shares to employees and directors, net		123,860		172		—		—		(172	)		—			—						—
Issuance of shares, in connection with interest expenses		43,005		61						(25	)											36
Issuance of shares to an investor		50,000		72						(23	)											49
Comprehensive income:
Foreign currency translation adjustments		—		—		—		—		—			(55	)		—		$	(55	)		(55	)
Net income (loss)		—		—		—		—		—			—			(219	)		(219	)		(219	)
Total comprehensive income																		$	(274	)
Balance as of December 31, 2011		3,451,948	$	4,286		326,797	$	369	$	116,338		$	*)—		$	(120,723	)				$	270

*) All accumulated other comprehensive income (loss) derived from foreign currency translation adjustments.

The accompanying notes are an integral part of the consolidated financial statements.

F-6

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. dollars in thousands, except share data

	Ordinary Shares				Preferred Shares				Additional paid-in			Accumulated			Total comprehensive		Total shareholders’
	Number		Amount		Number		Amount		capital			deficit			income		equity
Balance as of January 1, 2012		3,451,948		4,286		326,797		369		116,338			(120,723	)				270
Stock based compensation		—		—		—		—		20			—					20
Release of restricted shares to employees and directors, net		22,985		30		—		—		(30	)		—					—
Issuance of shares, in connection with interest expenses		15,380		21						(11	)							10
Issuance of shares to an investor		75,000		101						(26	)							75
Issuance of shares in connection with compensation to consultants		7,500		10						(4	)							6
Compensation related to warrant granted to convertible note holder		—		—		—		—		10			—					10
Net income		—		—		—		—		—			911		$	911		911
Total comprehensive income															$	911
Balance as of December 31, 2012		3,572,813	$	4,448		326,797	$	369	$	116,297		$	(119,812	)			$	1,302

The accompanying notes are an integral part of the consolidated financial statements.

F-7

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. dollars in thousands, except share data

	Ordinary Shares				Preferred Shares				Additional paid-in			Accumulated			Total comprehensive		Total shareholders’
	Number		Amount		Number		Amount		capital			deficit			income		equity
Balance as of January 1, 2013		3,572,813		4,448		326,797		369		116,297			(119,812	)				1,302
Stock based compensation		—		—		—		—		95			—					95
Release of restricted shares to employees and directors, net		176,317		238		—		—		(238	)		—					—
Issuance of shares in connection with compensation to consultants		30,000		42						9								51
Compensation related to warrant granted to convertible note holder		—		—		—		—		10			—					10
Net income		—		—		—		—		—			1,483		$	1,483		1,483
Total comprehensive income															$	1,483
Balance as of December 31, 2013		3,779,130	$	4,728		326,797	$	369	$	116,173		$	(118,329	)			$	2,941

The accompanying notes are an integral part of the consolidated financial statements.

F-8

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2013			2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,483		$	911		$	(219	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Income and expense items not involving cash flows:
Depreciation and amortization		46			52			91
Amortization of convertible notes premium and warrant		3			(5	)		(15	)
Accrued severance pay, net		5			(104	)		(31	)
Stock based compensation related to directors and employees		95			20			102
Stock based compensation related to shares to consultants		51			6			—
Interest expenses paid in shares		—			9			36
Gain from disposal of subsidiaries		—			—			(122	)
Gain from forgiveness of debt		(210	)		—			—
Changes in operating assets and liabilities:
Increase in other assets		15			(13	)		(5	)
Decrease (increase) in trade receivables, net and unbilled receivables		(763	)		196			84
Decrease (increase) in other accounts receivable and prepaid expenses		(88	)		(29	)		86
Increase (decrease) in trade payables		165			(357	)		356
Increase (decrease) in long-term and short-term deferred revenues, net		400			454			(913	)
Increase (decrease) in other accounts payable and accrued expenses		(4	)		(615	)		603
Increase (decrease) in long-term deferred rent payables		(16	)		(12	)		82
Net cash provided by operating activities		1,182			513			135
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(24	)		(29	)		(83	)
Long-term receivable		62			142			(192	)
Net cash provided (used in) by investing activities		38			113			(275	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank credit		11			45			186
Restricted cash		(19	)		(24	)		(140	)
Repayment of long-term loan		(635	)		(485	)		(500	)
Proceeds from issuance of share capital		—			75			50
Proceeds from long-term loan		144			129			550
Repayment of long-term convertible debt		(135	)		(135	)		—
Net cash provided by (used in) financing activities		(634	)		(395	)		146
EFFECT OF EXCHANGE RATE CHANGES ON CASH		—			—			1
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		586			231			7
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR		335			104			97
CASH AND CASH EQUIVALENTS AT THE END OF YEAR	$	921		$	335		$	104

The accompanying notes are an integral part of the consolidated financial statements.

F-9

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:

	Year ended December 31,
	2013		2012		2011
Supplemental disclosure of cash flow activities:
Cash paid during the year for:
Interest	$	169	$	155	$	136
Income tax	$	14	$	18	$	28
Supplemental disclosure of non-cash investing and financing activities:
Refinancing of short-term bank debt on a long-term basis	$	—	$	—	$	360
Conversion to shares of accrued interest expenses, waivers and deferred charges related to the convertible debt and note	$	—	$	9	$	36

The accompanying notes are an integral part of the consolidated financial statements.

F-10

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 1:- GENERAL

a) ViryaNet Ltd., an Israeli company (the “Company”), was established in 1988. The Company is a leading provider of software solutions that optimize and allow for the continuous improvement of service processes for mobile workforces. Using an integrated approach, the Company helps its customers attain the maximum benefits from ViryaNet G4, its mobile workforce management solution. This integrated approach consists of a Performance Management practice and an innovative product, ensuring that the Company’s customers can implement change, enable differentiation, and provide for continuous improvement. The Company has partnerships with leading platform and system integration companies that enable it to serve customers around the world.

b) The Company has three wholly-owned subsidiaries in the United States— ViryaNet Inc. and its two subsidiaries (iMedeon Inc., which is not active, and Utility Partners Inc. (collectively, “ViryaNet U.S.”)). During the year ended December 31, 2011, ViryaNet Inc. sold ViryaNet PTY Ltd., its subsidiary in Australia (“ViryaNet Australia”), and filed an application with the U.K. Companies House to strike off its wholly inactive subsidiary in the U.K., ViryaNet Europe Ltd, (“ViryaNet Europe”), which became effective in April 2012 (see Note 3).

c) The Company’s sales are generated in North America, Europe, Asia-Pacific and South America. As for major customers, see Note 14.

d) The Company devotes substantial efforts towards activities such as research and development, and marketing and selling its products. In the course of such activities, the Company and its subsidiaries have generated variable levels of revenues and operating results over the past several years and have not achieved positive working capital. There is no assurance that profitable operations or positive cash flows from operations can be maintained on a continuing basis.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation:

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). In the opinion of management, these financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented.

Use of estimates:

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to, collectability of accounts receivable, stock-based compensation, income tax accruals and the value of deferred tax assets. Estimates are also used to determine the remaining economic lives and carrying value of fixed assets and goodwill. Actual results could differ from those estimates.

Functional currency:

Most of the revenues of the Company are generated in U.S. dollars (“dollar” or “dollars”). In addition, a majority of the costs of the Company and its subsidiaries are incurred in dollars. The majority of financing and investment activities are effected in dollars. Management believes that the dollar is the primary currency in the economic environment in which the Company and its subsidiaries operate; therefore, the dollar is the functional and reporting currency. Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items (stated below) reflected in the statements of income (loss), the following exchange rates are used: (i) for transactions – exchange rates at transaction dates or average rates; and (ii) for other items (derived from non-monetary balance sheet items such as depreciation and amortization, etc.) – historical exchange rates. Currency transaction gains or losses are recorded in financial income or expenses, as appropriate.

Prior to the year ended December 31, 2012, for those former subsidiaries of the Company whose functional currency has been determined to be their local currency, assets and liabilities were translated at year-end exchange rates and statement of operations items were translated at average exchange rates prevailing during the year. Such translation adjustments were recorded as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity.

F-11

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Cash equivalents:

Cash equivalents are short-term, highly liquid investments that are readily convertible to cash, with original maturities of three months or less.

Restricted cash:

Restricted cash is a cash deposit that is restricted by the bank to secure repayment of bank loans (see Notes 8A(3)b and 8A(4)b).

Property and equipment:

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets at the following annual rates:

	%
Computers, peripheral equipment and software	33
Office furniture and equipment	6 - 25
Leasehold improvements	Depreciated evenly over the shorter of the term of the lease or the life of the asset

Long-Lived Assets:

The Company reviews long-lived assets, such as property and equipment, for impairment whenever events indicate that the carrying amounts might not be recoverable. Recoverability of property and equipment and other intangible assets is measured by comparing the projected undiscounted net cash flows associated with those assets to the assets’ carrying values. If an asset is considered impaired, it is written down to fair value, which is determined based on the asset’s projected discounted cash flows or appraised value, depending on the nature of the asset. During 2013, 2012 and 2011, no impairment losses were recorded.

Goodwill:

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.

The Company tests its goodwill for impairment annually on the last day of its fourth fiscal quarter, or more frequently if certain events or certain changes in circumstances indicate that it may be impaired. In assessing the recoverability of goodwill, the Company must make a series of assumptions about the estimated future cash flows and other factors to determine the fair value of the related intangible assets. There are inherent uncertainties related to these factors and to management’s exercise of judgment in applying these factors.

In September 2011, the Financial Accounting Standards Board (“FASB”) issued guidance on testing goodwill for impairment. The guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company did not elect to adopt this accounting guidance for its goodwill impairment test for fiscal years 2013, 2012 and 2011, and continued to use the two-step process detailed below.

F-12

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

According to the relevant FASB accounting standard, when the qualitative assessment is not elected, goodwill impairment testing is a two-step process. The first step is a comparison of the fair values of the Company’s reporting units to their respective carrying amounts. A reporting unit is an operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. The Company has determined that the consolidated Company represents a single reporting unit. The Company’s management believes that a step-one test performed by using enterprise book value (equity value plus debt, less cash and cash equivalents) as the “carrying amount” for purposes of the test provides a better indication as to whether a potential impairment of goodwill exists and whether a step-two test should be performed, than the use of equity carrying value as the “carrying amount”.

Because the consolidated Company (including its subsidiaries) represents a single reporting unit, in performing step one of the impairment test, the consolidated Company’s estimated fair value is compared to the consolidated Company’s enterprise book value as a whole. If the reporting unit’s (i.e., the consolidated Company’s) estimated fair value is equal to or greater than its enterprise book value, no impairment of goodwill exists and the test is complete at the first step. However, if the consolidated Company’s enterprise book value is greater than its estimated fair value, the second step must be completed to measure the amount of impairment of goodwill, if any. The second step of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill with its carrying amount to measure the amount of impairment loss, if any. If the implied fair value of goodwill is less than the carrying value of goodwill, then impairment exists and an impairment loss is recorded for the amount of the difference.

The estimated implied fair value of goodwill is determined by using an income approach. The income approach estimates fair value based on the reporting unit’s (i.e., the consolidated Company’s) estimated future cash flows, discounted by an estimated weighted-average cost of capital that reflects current market conditions, which reflect the overall level of inherent risk of that reporting unit. The income approach also requires the Company to make a series of assumptions concerning matters such as discount rates, revenue projections, profit margin projections and terminal value multiples.

The Company estimated its discount rates based on a blended rate of return, considering both debt and equity for comparable publicly-traded companies engaged in internet software services or application software. These comparable publicly traded companies operate in the same or a similar industry as the Company and have operating characteristics that are similar to the Company’s. The Company estimated its revenue projections and profit margin projections based on internal forecasts about future performance.

The estimated implied fair value obtained by using the income approach is compared to fair value obtained under a market approach for reasonableness. The market approach estimates fair value by applying sales, earnings and cash flow multiples to a reporting unit’s operating performance. The multiples are derived from comparable publicly-traded companies with similar operating and investment characteristics as the relevant reporting unit (in this case, the consolidated Company). The market approach requires the Company to make a series of assumptions relating to, among other things, the selection of comparable companies, comparable transactions and transaction premiums.

The estimated fair value of the consolidated Company as a reporting unit as of December 31, 2013 and 2012 was substantially in excess of its enterprise book value. Therefore, no impairment of goodwill was recorded during either 2013 or 2012.

Income taxes:

The Company accounts for income taxes in accordance with the provisions of Accounting Standards Codification (“ASC”) 740 (“Income Taxes”) using the liability method of accounting, whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and the tax basis for assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to the amounts that are more-likely-than-not to be realized.

F-13

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Deferred tax liabilities and assets are classified as current or non-current based on the classification of the related asset or liability for financial reporting or, if not related to an asset or liability for financial reporting, according to the expected reversal dates of the specific temporary differences.

For uncertain tax positions, the Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining whether the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate resolution. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within income tax expense.

As of December 31, 2013 and December 31, 2012, the Company recognized approximately $11 and $30, respectively, for unrecognized tax benefits, interest and penalties, which are included in other accounts payable and accrued expenses in the Company’s consolidated balance sheets.

Revenue recognition:

The Company generates revenues from licensing the right to use its software products directly to end-users. The Company also enters into license arrangements with indirect channels such as resellers and systems integrators whereby revenues are recognized upon sale to the end user by the reseller or the system integrator.

The Company also generates revenues from rendering professional services, including consulting, customization, implementation, training and post-contract maintenance and support.

Revenues from software license agreements are recognized in accordance with ASC 985-605-15 (“Software Revenue Recognition”).

ASC 985-605-15 generally requires revenue earned via software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the respective elements. ASC 985-605-15 requires that revenue be recognized under the “residual method” when vendor specific objective evidence (“VSOE”) of fair value exists for all undelivered elements and VSOE does not exist for all of the delivered elements. Under the residual method, any discount in the arrangement is allocated to the delivered elements. The VSOE of fair value of an undelivered element is determined based on the price charged for the undelivered element when sold separately. For post-contract customer support, the Company determines the VSOE based on the renewal price charged. For other services, such as consulting, implementation and training, the Company determines the VSOE based on the fixed daily rate charged in stand-alone service transactions. If VSOE of fair value does not exist for all elements to support the allocation of the total fee among all delivered and undelivered elements of the arrangement, revenue is deferred until such evidence exists for the undelivered elements, or until all elements are delivered, whichever is earlier.

Revenue from license fees is recognized when persuasive evidence of an agreement exists, the software product covered by written agreement or a purchase order signed by the customer has been delivered, the license fee is fixed or determinable, collectability is probable and VSOE of the fair value of undelivered elements exists.

Post-contract maintenance and support arrangements provide technical support and the right to unspecified updates on an if-and-when available basis. Maintenance and support revenue is deferred and recognized on a straight-line basis over the term of the agreement, which is, in most cases, one year. Revenue from rendering services such as consulting, implementation and training are recognized as work is performed.

Multiple element arrangements that include services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. Services that are considered essential consist primarily of significant production, customization or modification. If such services are provided as part of the arrangement, revenues under the arrangement are recognized using contract accounting based on a percentage of completion method, by comparing actual labor days incurred to total labor days estimated to be incurred over the duration of the contract, in accordance with ASC 605-35-05 (“Construction-Type and Production-Type Contracts”).

F-14

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

The Company classifies revenue as either software license revenue or services revenue. The Company allocates revenue based on the VSOE established for elements in each revenue arrangement and applies the residual method in arrangements in which VSOE was established for all undelivered elements. If the Company is unable to establish the VSOE for all undelivered elements, the Company first allocates revenue to any undelivered elements for which the VSOE has been established and then allocates revenue to the undelivered element for which the VSOE has not been established, based on management’s best estimate of the fair value of those undelivered elements, and then applies the residual method to determine the license fee. Management’s best estimate of fair value of undelivered elements for which the VSOE has not been established is based upon the VSOE of similar offerings and other objective criteria.

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contract. As of December 31, 2013, 2012 and 2011, no such losses were identified by the Company.

Deferred revenues include unearned fees received under maintenance and support contracts, and other amounts received from customers but not recognized as revenues in the current period.

The Company does not grant a right-of-return to its customers. The Company generally provides a warranty period of three months at no extra charge. As of December 31, 2013 and 2012, the Company’s provision for warranty cost was immaterial.

Advertising Costs:

The Company records advertising expenses as incurred, which amounted to approximately $70, $70, and $74 in the years ended December 31, 2013, 2012, and 2011, respectively, and which have been included as part of selling and marketing expenses.

Research and development costs:

Research and development expenses include salaries, employee benefits and other costs associated with product development, and are charged to income as incurred. Participations and grants received by the Company or its subsidiaries in respect of research and development activities are recognized as a reduction of research and development expenses as the related costs are incurred, or as the related milestone is met. Upfront fees received by the Company or its subsidiaries in connection with cooperation agreements are deferred and recognized over the period of the applicable agreements as a reduction of research and development expenses.

Capitalization of internally developed computer software costs begins upon the establishment of technological feasibility based on a working model. Due to the relatively short time period between the date on which the products achieve technological feasibility and the date on which they generally become available to customers, costs subject to capitalization have been immaterial for the Company and its subsidiaries and have been expensed as incurred.

Concentrations of credit risk:

Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, trade receivables and a long-term receivable.

The majority of the Company’s cash and cash equivalents are invested in dollar instruments with major banks in the United States and Israel. Such cash and cash equivalents may be in excess of insured limits or may not be insured at all in some jurisdictions. The amounts on deposit at December 31, 2013 and 2012 exceed the $250 federally insured limit by $667 and $93, respectively. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound, and, accordingly, minimal credit risk exists with respect to these assets.

The Company’s trade receivables are derived from sales to customers from a variety of industries and located primarily in North America, Europe, South America and Asia Pacific. While the Company does not require collateral from its customers, it does perform continuing credit evaluations of its customers’ financial condition.

As of December 31, 2013 three customers accounted for 65% of trade receivable and as of December 31, 2012 four customers accounted for 52% of trade receivable. The Company is not aware of any financial difficulties being experienced by its major customers.

The Company and its subsidiaries had no off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option contracts or other foreign hedging arrangements, as of December 31, 2013 and 2012.

F-15

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Allowance for doubtful accounts:

The allowance for doubtful accounts is determined on the basis of analysis of specific debts for which collection is doubtful. In determining the allowance for doubtful accounts, the Company considers, among other things, its past experience with such customers, the economic environment, the industry in which such customers operate and financial information available concerning such customers. In management’s opinion, the allowance for doubtful accounts adequately covers anticipated losses with respect to the Company’s accounts receivable. No allowance for doubtful accounts was required for the years ended December 31, 2013 and 2012.

Long term convertible debt:

The Company presented the outstanding principal amount of its long term convertible debt as a long-term liability in accordance with ASC Topic 470-20 (“Debt with Conversion and Other Options”). The debt was classified as a long-term liability until the date of conversion, on which it was to be reclassified as equity or as a short-term liability if the next contractual redemption date was less than twelve months from the balance sheet date. Accrued interest on the convertible debt was included in other accounts payable and accrued expenses. Since the contractual redemption date was August 3, 2013, which was less than twelve months from the previous year’s balance sheet date, the convertible debt was reclassified as a short-term liability as of December 31, 2012.

On July 18, 2012 the Company and the lender under the convertible debt, LibertyView Special Opportunities Fund, L.P. (“LibertyView”) agreed to modify the convertible debt agreement such that the Company would pay $270 of the original debt of $480 that was due in August 2013, in twelve equal monthly installments starting in July 2012. Under the terms of the agreement, the modified amount of $270 would not bear interest and LibertyView could convert the balance of the original debt into the Company’s ordinary shares, par value NIS 5.0 per share (“Ordinary Shares”) at any time at the original conversion price, prior to the last payment in June 2013. Once the Company was to pay all installments, the remaining outstanding balance of the original debt of $480, less any amount converted by LibertyView to Ordinary Shares prior to June 2013, was to be automatically forgiven and was to cease to be outstanding, and the entirety of the original debt was to be considered indefeasibly paid for all intents and purposes.

As part of the modified agreement the Company granted the lender under the convertible debt a warrant to purchase 60,000 Ordinary Shares of the Company at an exercise price of $0.80 per share,(the “Warrant”) which the lender is permitted to exercise in whole or in part no later than July 2015 (see Note 12- Warrants).

As provided in ASC 405-20-40, a liability is removed from the statement of financial position only if the creditor is paid and the debtor is relieved of the obligation, or the debtor is released legally either by the creditor or judicially from being the primary obligor. Therefore, any gain or loss resulting from the arrangement will be determined when and if any amount is forgiven.

Because the Company met all of the payment conditions and LibertyView did not convert any portion of the balance of the original debt to Ordinary Shares prior to payment of the last installment, which occurred in June 2013, the remaining outstanding principal balance of $210 was forgiven and was recorded as gain from forgiveness of debt in the Company’s statement of operations for the year ended December 31, 2013.

Furthermore, in June 2013 the Company repurchased the Warrant from LibertyView for an amount of $6, which was recorded in financial expenses.

For further details, see Note 9 below.

Convertible note:

The Company presents the outstanding principal amount of a convertible note that it issued in 2007 (see Note 12(a)) in shareholders’ equity in accordance with ASC Topic 815 (“Derivatives and Hedging”) and ASC Topic 480 (“Distinguishing Liabilities from Equity”). The convertible note is classified as an equity component since it has no repayment date, does not bear any interest, and may only be converted into Ordinary Shares. The convertible note was classified as paid-in capital in shareholders’ equity until the date of actual conversion (which subsequently occurred, as described in Note 17(a) below).

F-16

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Earnings (loss) per share:

Basic and diluted net income per share are presented in conformity with ASC 260 (“Earnings per Share”) for all years presented. Basic net earnings or loss per share is computed by dividing income or loss from continuing operations and from discontinued operations by the weighted average number of Ordinary Shares outstanding during the applicable period. Diluted net earnings or loss per share is computed by dividing net income or loss by the weighted average number of Ordinary Shares and potentially dilutive securities, as calculated using the treasury stock method, outstanding during the period. Potentially dilutive securities include shares issuable upon conversion of the convertible note. The Company’s outstanding Preferred A Shares are considered Ordinary Shares for this purpose, since they may be converted into Ordinary Shares at any time on a one-for-one basis.

Outstanding stock options, unvested restricted shares, warrants and shares issuable upon conversion of the long-term convertible debt have been excluded from the calculation of basic and diluted net earnings or loss per share to the extent that such securities are anti-dilutive. The total weighted-average number of shares excluded from the calculation of diluted net earnings or loss per share was 578, 31,871, and 464,256 for the years ended December 31, 2013, 2012 and 2011, respectively.

The following table summarizes information related to the computation of basic and diluted net earnings (loss) per share for the years indicated (U.S. dollars in thousands, except share and per share data).

	Year ended December 31
	2013		2012		2011
Income (loss) from continuing operations attributable to ordinary shares		1,483		911		(205	)
Loss from discontinued operations attributable to ordinary shares		—		—		(14	)
Net income (loss) attributable to ordinary shares		1,483		911		(219	)
Weighted average number of shares outstanding used in basic earnings (loss) per share calculation		4,064,298		3,896,018		3,671,547
Potential shares issuable upon conversion of convertible note		363,636		363,636		—
Additional shares underlying unvested stock		32,501		20,307		—
Weighted average number of ordinary shares outstanding used in diluted earnings (loss) per share calculation		4,460,435		4,279,961		3,671,547
BASIC NET EARNINGS (LOSS) PER SHARE (US$)
Continuing operations		0.36		0.23		(0.06	)
Discontinued operations		—		—		0.00
Net income (loss)		0.36		0.23		(0.06	)
DILUTED NET EARNINGS (LOSS) PER SHARE (US$)
Continuing operations		0.33		0.21		(0.06	)
Discontinued operations		—		—		0.00
Net income (loss)		0.33		0.21		(0.06	)

Accounting for stock-based compensation:

The Company accounts for stock-based compensation in accordance with ASC Topic 718 (“Compensation – Stock Compensation”) (“ASC 718”), which establishes accounting for stock-based grants that are awarded to employees as compensation for their services. ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations.

The Company recognizes compensation expense for the value of its awards granted based on the straight-line method over the requisite service period of each of the awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures.

The Company accounts for equity instruments issued to third party service providers (non-employees) in accordance with fair value based on an option-pricing model, pursuant to the guidance in ASC Topic 505-50 (“Equity-Based Payments to Non-Employees”).

F-17

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

The following table summarizes the various categories of expense recognized for share-based compensation as a result of the application of ASC 718:

	2013		2012		2011
Cost of revenues	$	—	$	1	$	—
Research and development cost		2		1		—
Selling and marketing expenses		15		8		5
General and administrative expenses		19		68		97
Total stock-based compensation expense	$	36	$	78	$	102

All restricted shares granted to employees in 2013 and 2011 were granted for no consideration; therefore their fair value was equal to the share price at the date of grant. No restricted shares were granted in 2012. The weighted average grant date fair value of shares granted during the years 2013 and 2011 was $1.35 and $1.10, respectively.

The unrecognized stock-based compensation cost calculated under the fair value method for shares incentives expected to vest (unvested shares net of expected forfeitures) as of December 31, 2013 was approximately $321 and is expected to be recognized over a weighted-average period of 3 years.

Sale of receivables:

From time to time, the Company sells certain of its accounts receivable to third parties, within the normal course of business, where such sales constitute a true sale, as determined in ASC Topic 860 (“Transfers and Servicing”). Under that accounting codification, a true sale occurs when control and risk of those trade receivables are fully transferred such that (a) the Company (i) transfers the proprietary rights in the receivable from the Company to the third party, (ii) legally isolates the receivable from the Company’s other assets and presumptively puts the receivable beyond the lawful reach of the Company and its creditors even in bankruptcy or other receivership, (iii) confers on the third party the right to pledge or exchange the receivable and (iv) eliminates the Company’s effective control over the receivable in the sense that the Company is not entitled and shall not be obligated to repurchase the receivable other than in case of a failure by the Company to fulfill its legal obligation, (b) the relevant receivable is derecognized and (c) cash is recorded. Where receivables are sold and the transfer of the right to future receipt of cash is related to underlying sales transactions for which the revenue has not been recognized but is ultimately expected to be recognized, the receivable is not derecognized and a liability is recorded as deferred revenue until the liability is discharged through the recognition of the revenue.

The balance of sold receivables amounted to approximately $141 and $350 as of December 31, 2013 and 2012, respectively. Sales of accounts receivable, related to transactions for which revenue has been recognized, amounted to $141 and $232 as of December 31, 2013 and 2012, respectively, and sales of accounts receivable, related to an annual renewal of support and maintenance transactions for which the revenue has been recorded as deferred revenue and is ultimately expected to be recognized as revenue, amounted to $0 and $118 as of December 31, 2013 and 2012, respectively.

The Company pays factoring fees associated with the sale of receivables based on the dollar value of the receivables sold and the time of payment. Such fees, which are considered to be primarily related to the Company’s financing activities, are included in financial expenses, net in the Company’s consolidated statements of operations.

Fair value of financial instruments:

The following methods and assumptions were used by the Company and its subsidiaries in estimating fair value disclosures for financial instruments:

The carrying amount reported in the balance sheet for cash and cash equivalents, restricted cash, trade receivables, unbilled receivables, other accounts receivable, short-term bank credit, current portion of debt, trade payables and other accounts payable approximates their fair value due to the short-term maturity of such instruments. The carrying amount reported in the balance sheet for the Company’s long-term receivable approximates its fair value, considering the interest rates charged and the security received in connection with the receivable.

F-18

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

The carrying amount of the Company’s borrowings under its long- term debt approximates fair value because the interest rates on the instruments (i) fluctuate due to the variable rates of interest accruing on such debt and (ii) represent borrowing rates that are also available in the market on similar terms.

Comprehensive income:

The Company accounts for comprehensive income in accordance with ASC 220, “Comprehensive Income.” This accounting codification establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in stockholders’ equity during the period except those resulting from investments by, or distributions to, shareholders. The Company determined that there is only a single component of other comprehensive income for the year ended December 31, 2011, which relates to foreign currency translation adjustments. No components of other comprehensive income were included for the years ended December 31, 2013 and 2012.

In May 2011, the FASB issued guidance that changed the requirement for presenting “Comprehensive Income” in the consolidated financial statements. The update requires an entity to present the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. The Company adopted this new guidance on January 1, 2012. However, since there was only one component of other comprehensive income for the year ended December 31, 2011 and none for the years ended December 31, 2013 and 2012, no additional statement was necessary.

Reclassification:

Certain prior period amounts have been reclassified to conform to the current period presentation.

Impact of recently issued accounting standards:

In February 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires companies to disclose significant amounts that have been reclassified out of accumulated other comprehensive income. Amounts that are required to be reclassified in their entirety to net income must be disclosed either on the face of the income statement or in the notes to the financial statements. Amounts that are not required to be reclassified in their entirety to net income in the same reporting period must be disclosed by a cross reference to other disclosures that provide additional information regarding such amounts. ASU No. 2013-02 is effective for fiscal years and interim periods beginning after December 15, 2012. The adoption of ASU No. 2013-02 has not had a material impact on the Company’s financial position or results of operations.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides explicit guidance on the financial statement presentation of an unrecognized tax benefit. ASU No. 2013-11 requires unrecognized tax benefits to be presented as a reduction to a deferred tax asset, except that, if a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position, then the unrecognized tax benefit should be presented as a liability. ASU No. 2013-11 has become effective for fiscal years and interim periods beginning after December 15, 2013. The adoption of ASU No. 2013-11 has not had a material impact on the Company’s financial position or results of operations.

F-19

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a company’s contracts with customers. ASU 2014-09 will be effective beginning the first quarter of the Company’s fiscal year 2017 and early application is not permitted. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company is currently evaluating the effect ASU 2014-09 will have on the Company’s Consolidated Financial Statements and disclosures.

NOTE 3:- DISCONTINUED OPERATIONS

During fiscal year 2011, the Company decided to explore strategic alternatives to its direct sales activities in Australia in order to focus on indirect channels in the Asia-Pacific region, a decision which culminated in the sale of ViryaNet Australia. ViryaNet Australia’s revenues and assets accounted for, and constituted (respectively) less than 10% of the Company’s consolidated revenues and assets during each of the three years in the period ended December 31, 2011. On December 31, 2011, the Company completed the sale of 100% of the common stock of ViryaNet Australia to the Hosking Family Trust, owned by the former general manager of ViryaNet Australia, Mark Hosking (the “Buyer”), for consideration of $340. The consideration is to be paid as follows; $100 was due and paid on January 2, 2012 and the balance of $240 is paid over a period of four years in equal quarterly installment starting March 31, 2012, and bears interest at a fixed annual rate of 3.5%, paid quarterly. The balance of the Buyer’s payment obligation is secured through a personal guarantee provided by the Buyer. The Buyer’s payments during fiscal year 2014 in an aggregate amount of $76 are classified as current maturities within prepaid and other receivables in current assets, and the payments to be made beyond December 31, 2014, in an aggregate amount of $63, are classified as a long-term receivable on the Company’s consolidated balance sheets.

During fiscal year 2011, the Company decided to strike off its wholly owned subsidiary in the U.K., ViryaNet Europe, due to inactivity, by filing an application with the U.K. Companies House in December 2011, which became effective in April 2012.

Information related to ViryaNet Australia and ViryaNet Europe (the “Former Subsidiaries”) has been reflected in the accompanying consolidated financial statements as follows:

• Balance sheets – As a result of the disposal of both Former Subsidiaries, there are no remaining assets and liabilities related to those Former Subsidiaries in the Company’s consolidated balance sheets as of December 31, 2012 and 2013.

• Statements of operations – The Former Subsidiaries’ loss from operations for the year ended December 31, 2011 has been classified as discontinued operations. Loss from discontinued operations for the year ended December 31, 2011 also includes additional gain and loss on disposal of the Former Subsidiaries, as further described below. The statement of operations for the years ended December 31, 2013 and 2012 does not include any amount related to discontinued operations.

• Statements of cash flows – The Former Subsidiaries’ cash flows prior to their disposal for the year ended December 31, 2011 have been included in, and not reported separately from, the Company’s cash flows. The consolidated statements of cash flows for the year ended December 31, 2011 also include the effects of the disposal of the Former Subsidiaries.

F-20

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 3:- DISCONTINUED OPERATIONS (CONT.)

Sale and disposal of consolidated subsidiaries in which the Company has no continuing involvement are classified as discontinued operations. The gains or losses on these transactions are classified within discontinued operations in the Company’s consolidated statements of operations. The Company has also reclassified its historical results of operations to remove the operations of these entities from its revenues and expenses, collapsing the net income or loss from these operations into a single line within discontinued operations.

The impact of the transactions and/or processes whereby the above-described operations were discontinued during the year ended December 31, 2011 is summarized as follows:

Subsidiary	Location	Proceeds		Gain (Loss)
ViryaNet Australia	Australia	$	340	$	250
ViryaNet Europe	United Kingdom		—		(128	)

The table below summarizes certain financial information with respect to the Company’s discontinued operations for the year ended December 31, 2011:

Revenues	$	790
Loss from discontinued operations (No income tax expense or benefit)		(136	)
Gain on disposal of discontinued operations (No income tax expense or benefit)		122
Total loss from disposal of discontinued operations	$	(14	)

NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

Other accounts receivable and prepaid expenses consisted of the following:

	December 31,
	2013		2012
Prepaid expenses	$	215	$	136
Current maturities of long-term receivable (see Note 3)		76		73
Government authorities		13		7
		304	$	216

NOTE 5:- PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following as of the year-end dates listed below:

	As of December 31,
	2013		2012
Cost:
Computers, peripheral equipment and software	$	1,429	$	1,407
Office furniture and equipment		199		197
Leasehold improvements		91		91
		1,719		1,695
Accumulated depreciation		1,671		1,625
Depreciated cost	$	48	$	70

Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was approximately $46, $52 and $45, respectively.

F-21

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 6:- SHORT-TERM BANK CREDIT

The Company’s short-term bank credit as of December 31, 2013 and 2012 was denominated in New Israeli Shekels, or NIS, and its weighted average interest rates were 6.2% and 7%, respectively.

The Company has credit facilities with Bank Hapoalim (the “Bank”) and Bank Leumi that enable it to borrow funds under a revolving line of credit. The line of credit denominated in NIS currency accrues interest on the daily outstanding balance at the prime rate plus 3.3% per annum.

On December 18, 2011 the Bank agreed to convert a short term credit in an amount of $360 and a long-term loan in an amount of $100 to a long-term loan in an amount of $460, payable in 11 monthly payments starting February 6, 2013 (see Note 8).

The Company’s former bank covenants, as part of its overall bank financing arrangement, required that on a quarterly basis (i) the Company’s shareholders’ equity shall be at least the higher of (a) 13% of its total assets, or (b) $ 1,500, and (ii) the Company’s cash balance shall not be less than $500.

On July 10, 2011 the Company received from the Bank a waiver of the bank covenants for the remaining quarters of 2011 and for the first quarter of 2012. In connection with the waiver the Company paid fees of $15 to the Bank.

On March 12, 2012 the Company received from the Bank a waiver of its bank covenants for the remaining quarters of 2012 and for the first quarter of 2013. In connection with the waiver the Company paid fees of $8 to the Bank.

On January 20, 2013 the Bank agreed to perpetually cancel the bank covenants and starting from the first quarter of 2013, the bank covenants are no longer in effect. In connection with the cancellation, the Company paid fees of $5 to the Bank.

The Company’s debt to the Bank is secured in favor of the Bank by a floating charge on all of the Company’s assets and by a personal guarantee of Samuel HaCohen, the Company’s Chairman of the Board of Directors.

NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Other accounts payable and accrued expenses consisted of the following:

	December 31,
	2013		2012
Employees and payroll accruals	$	1,029	$	946
Accrued expenses		355		442
	$	1,384	$	1,388

F-22

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 8:- LONG-TERM BANK LOAN

a. Long-term loans classified by currency of repayment were as follows as of the year-end listed in the below table:

	Currency	Interest Rate	December 31,
Bank			2013			2012
Bank Hapoalim (1)	U.S. $	LIBOR*+ 3.25%	$	—		$	37
Bank Hapoalim (2)	U.S. $	LIBOR**+ 5.70%		—			460
Bank Otsar Ha-Hayal (3a)	NIS	PRIME+3.50%		144			180
Bank Otsar Ha-Hayal (3b)	NIS	PRIME+3.50%		273			336
Bank Otsar Ha-Hayal (4a)	NIS	PRIME+3.50%		114			130
Bank Otsar Ha-Hayal (4b)	NIS	PRIME+3.50%		121			—
Less - current maturities				(199	)		(646	)
			$	453		$	497

* 3 Months LIBOR

** 1 Month LIBOR

(1) Payable monthly through January 1, 2013.

(2) On December 18, 2011, the Bank agreed to convert an outstanding short term credit in an amount of $360 and a long-term loan balance in an amount of $100 to a long-term loan in a total amount of $460, payable in 11 monthly payments starting February 6, 2013. The interest is payable monthly starting January 6, 2012. There was no gain or loss from the conversion. The conversion was accounted for as a modification of debt under ASC 470-50-40-14.

(3) a. On June 28, 2011 the Company received an approval from the State Guaranteed Medium Business Assistance Fund (the “Fund”) for a loan in an amount of NIS 2,100,000, guaranteed by the Israeli government. The disbursement of the loan to the Company was contingent upon its securing an equity investment of at least NIS 500,000. The required equity investment may be effected in one of two manners: (i) a restricted shareholders’ loan payable after five years, or (ii) an equity investment in which the investors receive Company shares. The Company elected the equity investment route.

On July 7, 2011, following the receipt by the Company of NIS 170,000, or $50, via an equity investment by Jerusalem Technology Investments pursuant to a share purchase agreement dated June 30, 2011 (see Note 12(c)), thereby meeting, in part, the condition for disbursement of the loan, the Company received part of the total amount approved to it under the loan— NIS 750,000— from the Fund’s participating bank, Bank Otsar Ha-Hayal (“Bank Otsar”). The Loan bears annual interest at the Israeli prime rate, plus 3.5% (equal to 8.57% as of the time of the initial loan disbursement), and the principal and interest are payable in 49 equal monthly payments of NIS 18,080 each (which includes interest), beginning on August 6, 2012. Interest is payable on a monthly basis beginning on August 6, 2011.

b. The balance of the loan provided by Bank Otsar, or NIS 1,350,000, was disbursed to the Company on September 6, 2011. The loan bears annual interest at the Israeli prime rate, plus 3.5% (equal to 8.57% as of the time of the initial loan disbursement), and the principal and interest are payable in 49 equal monthly payments of NIS 32,545 each (which includes the interest), beginning on September 8, 2012. Interest is payable on a monthly basis beginning on October 7, 2011.

Since the Company did not receive the balance of NIS 330,000 in equity investments as of the date of the disbursement of the loan balance (September 6, 2011), as required under the loan terms set by the Fund, Bank Otsar Ha-Hayal instead restricted the Company’s access to an amount of $140 in cash from the loan proceeds, as a means to secure the repayment of the loan. This $140 amount is classified as restricted cash in the Company’s current assets.

c. Repayment of the loan provided by Bank Otsar is guaranteed by the Israeli government, as well as by a personal guarantee of Samuel HaCohen, the Company’s Chairman of the Board of Directors.

(4) a. On October 17, 2012 the Company received approval from the Fund for an additional loan in an amount of NIS 1,000,000, guaranteed by the Israeli government, and on October 24, 2012 the Company received NIS 500,000 of the approved amount. The repayment of the loan is secured by a restriction on the Company’s access to an amount of NIS 90,000 of the loan proceeds, and by a personal guarantee of Samuel HaCohen, the Company’s Chairman of the Board of Directors (see note 16) and by the Israeli government.

The loan from Bank Otsar bears annual interest at the Israeli prime rate, plus 3.5% (equal to 7.25% as of the time of loan disbursement), and the principal and interest are payable in 60 equal monthly payments of NIS 9,960 each (which includes interest as well), beginning on November 29, 2012.

F-23

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 8:- LONG-TERM BANK LOAN (CONT.)

b. On January 13, 2013 the Company received a loan of NIS 500,000 from Bank Otsar Ha-Hayal, which was the second installment of the additional loan of NIS 1,000,000 approved by the State Guaranteed Medium Business Assistance Fund. The repayment of the loan is secured by a restriction on the Company’s access to an additional amount of NIS 145,000 from the loan proceeds, by a personal guarantee of Samuel HaCohen, the Company’s Chairman of the Board of Directors and by the Israeli government’s guarantee.

The loan bears annual interest at the Israeli prime rate, plus 3.5% (equal to 6.75% as of the time of loan disbursement), and the principal and interest are payable in 60 equal monthly payments of NIS 9,842 each (which includes the interest as well), beginning on February 14, 2013.

b. The Company’s loans (net of current maturities) mature in the following years after the respective balance sheet dates listed below:

	December 31,
	2013		2012
2013		—		646
2014		199		160
2015		216		174
2016		174		138
2017		60		25
2018		3		—
Total	$	652	$	1,143

c. For details concerning charges, bank covenants and security interests related to the Company’s loans, see Notes 6 and 11(c).

NOTE 9:- LONG TERM CONVERTIBLE DEBT

Long – term convertible debt issued by the Company was as follows as of the dates listed below:

	Interest rate			December 31,
				2013		2012
Convertible debt:
Par		7.5	%	$	—	$	345
Deemed premium, net *					—		7
Reclassification to current liabilities					—		352
				$	—	$	—

* Amortization of the deemed premium added to income was $15 for 2012 and $7 for 2013.

The convertible debt owed to LibertyView carried interest at a rate of 7.5%, payable quarterly, was due on August 3, 2013 and was convertible into the Company’s Ordinary Shares at the discretion of LibertyView at any time during the term of the loan at a price of $11.025 per Ordinary Share.

On July 18, 2012 the Company and LibertyView agreed to modify the convertible debt agreement such that the Company would pay $270 of the original debt of $480 that was due in August 2013, in twelve equal monthly installments starting in July 2012, The Company paid all installments and since LibertyView did not convert the balance of the original debt or any portion of it to Ordinary Shares prior to payment of the last installment, then upon the payment of the final installment in June 2013, an amount of $210, which was the remaining outstanding balance of the original debt of $480, was forgiven and ceased to be outstanding, and the entirety of original debt was considered indefeasibly paid for all intents and purposes.

The Company repaid $ 135 per year under this arrangement during each of 2013 and 2012.

For further details, see Note 2 “Significant Accounting Policies – Long Term Convertible Debt.

F-24

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 10:- SEVERANCE PAY:

The Company’s liability for severance pay to its Israeli employees is calculated pursuant to Israel’s Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date.

Employees are entitled to one month’s salary for each year of employment or a portion thereof. The Company’s liability for all of its employees in Israel is fully provided for by monthly deposits with insurance policies and by the Company’s severance pay accrual. The value of these policies is recorded as an asset on the Company’s balance sheet.

The deposited funds for the Company’s Israeli employees include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel’s Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrender value of these policies, and includes immaterial profits.

Severance expenses for the years ended December 31, 2013, 2012 and 2011 amounted to approximately $120, $70 and $92 respectively.

NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES

a. Royalty commitments:

The Company participated in the past in programs sponsored by the Israeli Government for the support of research and development activities, through the Office of the Chief Scientist of Israel’s Ministry of Economy (formerly the Ministry of Industry, Trade and Labor) (the “OCS”). The Company had obtained aggregate grants from the OCS of $372, which were received during fiscal years 2002 and 2003.

Under the Company’s research and development agreement with the OCS, and pursuant to applicable laws, the Company is required to pay royalties at the rate of between 3% to 5% on revenues derived from products developed with royalty-bearing grants provided by the OCS, in an amount of up to 100% of the grants received from the OCS. The obligation to pay these royalties is contingent on actual sales of the products. In the absence of such sales, no payment is required.

Royalties are subject to interest on the U.S. dollar-linked value of the total grants received at the annual rate of LIBOR applicable to U.S. dollar deposits.

Through December 31, 2013, the Company had paid or accrued royalties to the OCS in an amount of $42. As of December 31, 2013, the total contingent liability to the OCS amounted to $404.

b. Lease commitments:

The Company’s facilities, its subsidiaries’ facilities and its motor vehicles are leased under various operating lease agreements, which expire on various dates, the latest of which is in 2016.

Future minimum rental payments for facilities under non-cancelable operating leases are as follows:

Year ending December 31,	Operating Lease Obligations
2014		351
2015		326
2016		213
Total	$	890

The Company extended the current office lease agreement for its offices in Jerusalem, Israel, which expired in November 2012, through October 2015, with an option to extend it for another three years. The Company leases 6,025 square feet of office space, which is utilized primarily for administrative, research and development, service and technical support purposes, with an average annual rent of approximately $145 payable starting in November 2012.

F-25

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

ViryaNet, Inc., the Company’s US subsidiary located in Massachusetts, signed a new office lease agreement in February 2011 and relocated its facilities in June 2011 to a new location in Westborough, Massachusetts. ViryaNet Inc. leases 10,372 square feet of office space, which is utilized primarily for administrative, marketing, sales, service and technical support purposes, with an average annual rent of approximately $197, payable starting in January 2012. The non-cancellable lease agreement for these premises expires on December 31, 2016 and contains a rent escalation clause. The long-term deferred rent payable that appears on the Company’s balance sheet as of December 31, 2013 includes accrued fees for these facilities that are paid over the lease period.

Lease expenses in respect of facilities were approximately $342, $316 and $343 for the years ended December 31, 2013, 2012 and 2011, respectively.

Lease expenses in respect of motor vehicles for the years ended December 31, 2013, 2012 and 2011 were approximately $132, $136 and $150, respectively. In addition, as of December 31, 2013, future minimum rental payments for motor vehicles leased for the years 2014, 2015 and 2016 were $92, $25 and $12 respectively.

c. Charges and guarantees:

1. There is a floating charge on all of the Company’s assets in favor of the Bank.

2. The Company has obtained a bank guarantee in an amount of $79, in order to secure an office lease agreement.

NOTE 12:- SHAREHOLDERS’ EQUITY

The Company’s Ordinary Shares are quoted and traded on the OTCQB (a marketplace for OTC reporting issuers who are current in their reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).

The Company’s Preferred A Shares are not publicly traded.

a. General:

(i). The Ordinary Shares and the Preferred A Shares confer upon holders thereof the right to receive notice of, participate in and vote at general shareholder meetings of the Company, the right to receive dividends, if declared, and the right to receive any remaining assets of the Company upon liquidation, if any, after full payment is made to any creditors.

The Preferred A Shares have all rights and privileges that are possessed by the Company’s Ordinary Shares, including, without limitation, voting rights on an as-converted basis, and have an aggregate liquidation preference of $ 2,500 over the Ordinary Shares in any distributions to the Company’s shareholders. The Preferred A Shares may be converted into Ordinary Shares at any time on a one-for-one basis.

(ii). On December 19, 2007, the Company issued to a group of financial investors 363,636 Ordinary Shares at a price of $1.65 per share for total consideration of $600. The transaction also included the issuance by the Company of a non-interest bearing convertible note of $600 principal amount that is convertible into 363,636 Ordinary Shares at a conversion price of $1.65 per Ordinary Share and warrants to purchase an aggregate of up to 600,000 Ordinary Shares at an exercise price of $2.00 per Ordinary Share, which expired on December 19, 2010. The convertible note does not have any maturity date, does not bear any interest, is not subject to repayment in any event, including liquidation, can only be converted into Ordinary Shares at any time at the holder’s discretion and is classified as paid-in capital in shareholders’ equity until the date of actual conversion (see Notes 2 and 17).

As of December 31, 2013 and 2012, the total amount of the convertible note of $600 was classified as equity in accordance with ASC 815, “Accounting for Derivative Instruments and Hedging Activities” and ASC 480, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”.

F-26

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 12:- SHAREHOLDERS’ EQUITY (CONT.)

(iii). On June 30, 2011, the Company entered into a share purchase agreement (the “SPA”) with Jerusalem Technology Investments Ltd, (the “Investor”), a company with which two of the Company’s directors—Samuel HaCohen and Vladimir Morgenstern— and one of the Company’s major shareholders (Jerusalem High-tech Founders, Ltd.) are affiliated. Pursuant to the SPA, the Investor committed to invest in the Company an amount of $250 within 31 days from the date of the agreement, as consideration for the issuance to the Investor of 250,000 of the Company’s Ordinary Shares at a price of $1.00 per Ordinary Share. 50,000 of those Ordinary Shares were issued on June 30, 2011, upon a payment of $50 by the Investor. In February 2012, the Investor invested an additional $75, a portion of its total commitment, as consideration for the issuance to the Investor of an additional 75,000 of the Company’s Ordinary Shares. This equity financing constituted an extraordinary transaction in which two of the Company’s directors possessed a personal interest and was therefore approved by the Company’s audit committee and Board of Directors in accordance with the requirements of the Israeli Companies Law.

On December 17, 2012 the Company and the Investor reached an agreement under which the parties terminated the SPA by mutual consent such that no further investment will be made under the SPA by the Investor, and each of the Company and the Investor released each other from any claims related to the SPA. In lieu of the additional amount of $125 that was not invested, Samuel HaCohen, the Company’s chairman and an affiliate of the Investor, signed a personal guarantee in favor of two banks, Bank Otsar Ha-Hayal and Bank Leumi, in order to enable the Company to secure loans from these banks (see Note 8). No further consideration was provided to the Investor and/or Samuel HaCohen in connection with the personal guarantee. This agreement constituted an extraordinary transaction with a director who possessed a personal interest and was therefore approved by the Company’s audit committee and Board of Directors in accordance with the requirements of the Israeli Companies Law.

(iv). During 2012 the Company issued 15,380 Ordinary Shares to investors in payment of interest expenses.

(v). During 2012 the Company issued 7,500 Ordinary Shares to a service provider as consideration for consulting services.

(vi). During 2013 the Company issued 30,000 Ordinary Shares to a service provider as consideration for consulting services.

b. Stock – based compensation:

(i). The Company’s previous stock options plans, the 1996, 1997, 1998 and 1999 Stock Option Plans (the “Prior Plans”), expired prior to December 31, 2009.

In November 2005, the Company adopted a new Israeli share option and restricted share plan and a new international share option and restricted share plan (the “2005 Share Option Plans”), which superseded and replaced the Prior Plans and provide the Company with the ability to grant restricted shares in addition to options under various tax regimes.

Under the 2005 Share Option Plans, options, restricted shares and other share-based awards may be granted to employees, directors, office holders, service providers, consultants and any other person or entity whose services shall be determined by the Company’s Board of Directors to be valuable to the Company and/or its affiliated companies. The exercise price of the options granted under the 2005 Share Option Plans is to be determined by the directors at the time of grant. The options granted expire no later than ten years from the date of grant. The 2005 Share Option Plans expire in 2015. Any options or restricted shares that are canceled or forfeited before expiration become available for future grants. The schedule and terms of vesting of options and restricted shares are determined by the Company’s Board of Directors.

Any options that remained available for grant under any of the Company’s Prior Plans are available for subsequent grant under the 2005 Share Option Plans. In addition, if any outstanding award under the Company’s Prior Plans should for any reason expire, be canceled or be forfeited without having been exercised in full, the shares subject to the unexercised, canceled or terminated portion of such award shall become available for subsequent grant under the 2005 Share Option Plans.

In February 2010, at the Company’s 2010 annual shareholders meeting, the Company’s shareholders approved authorizing the Company’s audit committee and board of directors to grant, on an annual basis, up to 20,000 restricted shares to each director of the Company. The actual terms of the grants, including the vesting schedule and related terms, shall be as determined by the Company’s Board of Directors as long as the annual grant per each director does not exceed such 20,000 restricted shares.

As of December 31, 2013, an aggregate of 213,784 Ordinary Shares of the Company were available for future grant under the 2005 Share Option Plans.

F-27

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 12:- SHAREHOLDERS’ EQUITY (CONT.)

(ii). During the year ended December 31, 2011, the Company granted to its directors an aggregate of 75,000 restricted share units, which were released from restriction during 2011. The Company has accounted for this award in accordance with ASC 718-10. The total grant date fair value of $83, reflecting the quoted market price of the Company’s Ordinary Shares as of the date of grant over the purchase price of $0, was recorded as compensation expense ratably over the release period of the restricted shares units.

(iii). No restricted share units or options were granted during the year ended December 31, 2012.

(iv). During the year ended December 31, 2013, the Company granted to its employees and directors an aggregate of 310,000 restricted share units. Of the restricted share units that were granted, 153,332 shares were released in 2013 and 156,668 shares are released ratably on an annual basis over one to three-year release period, starting from the date of grant. Release of the restrictions from the restricted share units is subject to acceleration upon the occurrence of certain events such as a merger or acquisition. The Company has accounted for this award in accordance with ASC 718-10. The total grant date fair value of $418, reflecting the quoted market price of the Company’s Ordinary Shares as of the date of grant over the purchase price of $0, is recorded as compensation expense ratably over the release period of the restricted share units.

(v). No options were exercised during the years ended December 31, 2013, 2012 or 2011. No compensation expense related to options was recognized during the years ended December 31, 2013, 2012 or 2011.

(vi). A summary of the status of the Company’s restricted share units as of December 31, 2013, 2012 and 2011, and changes during the years then ended is presented below:

Year ended December 31, 2011

Restricted share units	Number of Restricted Share Units			Weighted average grant- date fair value
Restricted at January 1, 2011		146,580		$	0.72
Granted		75,000		$	1.10
Vested		(123,861	)	$	0.95
Forfeited		(48,414	)	$	0.72
Restricted at December 31, 2011		49,305		$	0.72

Year ended December 31, 2012

Restricted shares units	Number of Restricted Share Units			Weighted average grant- date fair value
Restricted at January 1, 2012		49,305		$	0.72
Granted		—		$	—
Vested		(22,986	)	$	0.72
Forfeited		(3,333	)	$	0.70
Restricted at December 31, 2012		22,986		$	0.72

Year ended December 31, 2013

Restricted shares units	Number of Restricted Share Units			Weighted average grant- date fair value
Restricted at January 1, 2013		22,986		$	0.72
Granted		310,000		$	1.35
Vested		(176,317	)	$	0.53
Forfeited		—			—
Restricted at December 31, 2013		156,669		$	2.18

(vii). Options and shares issued to consultants:

As of December 31, 2013, there were no outstanding options or restricted share units that had been issued to consultants.

F-28

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 12:- SHAREHOLDERS’ EQUITY (CONT.)

c. Warrants:

The Company’s outstanding warrants that had been issued to investors and consultants were as follows as of December 31, 2013 and 2012:

	Warrants to purchase Ordinary Shares		Exercise price per share		Exercisable through	Outstanding as of December 31, 2013		Outstanding as of December 31, 2012
Issued April 1998		578	$	1.25	No expiration date		578		578
Issued July 2012 (1)		60,000		0.80	July 12, 2015		—		60,000

(1) In connection with a July 2012 agreement with LibertyView, which made a convertible loan to the Company (see Note 9) the Company granted LibertyView warrants to purchase 60,000 Ordinary Shares of the Company at an exercise price of $0.80 per share, which were to be exercisable in whole or in part no later than July 12, 2015.

This transaction was accounted for according to ASC 470-20. The fair value of these warrants was determined using the Black-Scholes pricing model, assuming a risk free interest rate of 2.15%, a volatility factor of 71%, dividend yield of 0% and expected term of three years. The fair value of these warrants of $21 was amortized during the term of the convertible note, which expired in August 2013.

In June 2013 the Company repurchased the warrants for an amount of $6, which was recorded as financial expense, and as a result the warrants are no longer outstanding.

d. Dividends:

In the event that cash dividends are declared in the future, such dividends will be paid in NIS or in foreign currency, subject to any statutory limitations. Dividends paid to shareholders in non-Israeli currency may be converted into dollars on the basis of the exchange rate prevailing at the time of payment. The Company does not intend to pay cash dividends in the foreseeable future.

NOTE 13:- TAXES ON INCOME

The Company and its subsidiaries file federal and state income tax returns in the U.S. and Israel. ViryaNet Ltd. may be subject to examination by the Israel tax authorities for fiscal years 2010 through 2013. ViryaNet Inc.’s (the U.S. subsidiary) tax returns through 2009 were audited by the U.S. Internal Revenue Service (the “IRS”) which resulted in no incremental tax liability. ViryaNet Inc. may be subject to examination by the IRS for fiscal years 2010 through 2013. ViryaNet Australia and ViryaNet Europe were disposed of during 2011 (see Note 3).

The Company believes that it has adequately provided for any reasonably foreseeable outcome related to tax audits and settlement. The final tax outcome of the Company’s tax audits could be different from what is reflected in the Company’s income tax provisions and accruals. Such differences could have a material effect on the Company’s income tax provision and net income in the periods in which such determination is made.

Changes in Israeli tax rates:

Israeli companies were generally subject to corporate tax at the rate of 25% on their taxable income for the 2013 and 2012 tax years, and 24% for the 2011 tax year. The corporate tax rate was increased to 26.5% for 2014 and thereafter. Beginning as of 2010, Israeli companies are subject to regular corporate tax rate on their capital gains.

The changes in tax rates did not have an effect on the Company’s tax position due to significant accumulated losses for income tax purposes, for which a full valuation has been provided.

F-29

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 13:- TAXES ON INCOME (CONT.)

Tax benefits under the Law for the Encouragement of Capital Investments, 1959:

The Company’s production facilities were granted “Approved Enterprise” status under the Law for Encouragement of Capital Investments, 1959 (the “Investment Law”), for three separate investment programs, which were approved in February 1989, March 1995 and April 1998.

Generally, “Approved Enterprise” tax benefits are limited to 12 years from commencement of production or 14 years from the date of approval, whichever expires earlier.

Pursuant to the Investment Law, the Company elected for its investment program the “alternative benefits” track and waived government grants in return for a tax exemption. The Company’s offices and its research and development center are located in Jerusalem, in a region defined as a “Priority A Development Region.” Therefore, income derived from this program was to be tax-exempt for a period of ten years commencing with the year in which the program first earns taxable income, subject to certain conditions.

As the Company currently has no taxable income, the benefits from this program have not yet been utilized.

The Company’s entitlement to the above benefits was conditioned upon the Company’s fulfilling the conditions stipulated by the Investment Law, regulations published thereunder and the letters of approval for the Company’s specific investments in “Approved Enterprises.” In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits (if any), in whole or in part, including interest and adjustments in accordance with changes to the Israeli Consumer Price Index (the “CPI”).

If the retained tax-exempt income were distributed, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not chosen the alternative tax benefits (rate of 10% - 25% based on the percentage of foreign ownership in the Company’s shares) on the gross amount distributed. In addition, these dividends would be subject to a 15% withholding tax. The Company’s Board of Directors has determined that such tax-exempt income will not be distributed as dividends.

The Investment Law also grants entitlement to accelerated depreciation claim on buildings and equipment used by an “Approved Enterprise” during the first five tax years in which it uses the assets.

Income from sources other than the “Approved Enterprise” during the benefit period is subject to tax at the regular Israeli corporate tax rate, as described above.

On April 1, 2005, an amendment to the Investment Law came into effect (the “2005 Amendment”), which significantly changed the provisions of the Investment Law. The 2005 Amendment limits the scope of enterprises which may be approved by the Israeli Investment Center of the Ministry of Economy (formerly the Ministry of Industry and Commerce) (the “Investment Center”) by setting criteria for the approval of a facility as a Privileged Enterprise, such as provisions generally requiring that at least 25% of the Privileged Enterprise’s income be derived from export. Additionally, the 2005 Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies that choose the “alternative benefits” track no longer require Investment Center approval in order to qualify for tax benefits. However, the 2005 Amendment provides that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the Investment Law as they were on the date of such approval.

In 2011, new legislation amending to the Investment Law was adopted (the “2011 Amendment”). Under the 2011 Amendment, a uniform corporate tax rate will apply to all qualifying income of certain Industrial Companies (requirement of a minimum export of 25% of the company’s total turnover), as opposed to the current law’s incentives, which are limited to income from Approved Enterprises during their benefits period. Under the 2011 Amendment, the uniform tax rate will be 10% in areas in Israel designated as Development Zone A and 15% elsewhere in Israel during 2011-2012, in 2013 7% and 12.5%, respectively and from 2014, 9% and 16%, respectively. The profits of these Industrial Companies will be freely distributable as dividends, subject to a 15% (20% from 2014) withholding tax (or lower, under an applicable tax treaty).

The “Approved Enterprise” status granted to two of the Company’s investment programs— in February 1989 and March 1995, respectively— expired prior to 2012, and the tax benefits period for the Company’s April 1998 Approved Enterprise program expired in April 2012.

As the Company did not have any taxable income prior to the expiration of this program, the benefits from this program have not been utilized.

F-30

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 13:- TAXES ON INCOME (CONT.)

Therefore, as of December 31, 2013, the Company is not entitled to any future benefits under any of these investment programs or any other investment programs.

Tax benefits under Israel’s Law for the Encouragement of Industry (Taxation), 1969:

The Company currently qualifies as an “industrial company” under the above law and, as such, is entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, and the right to claim public issuance expenses and amortization of patents and other intangible property rights as a deduction over eight years for tax purposes.

Non-Israeli subsidiaries:

Non-Israeli subsidiaries are taxed according to the tax laws in their respective domiciles of residence. If earnings are distributed in Israel in the form of dividends or otherwise, the Company may be subject to additional Israeli income tax (subject to an adjustment for foreign tax credits) and foreign withholding taxes. The Company’s management has determined that it will not distribute any amounts of its undistributed income as a dividend. The Company intends to reinvest the amount of such income. Accordingly, no deferred income taxes have been provided.

Net operating losses carryforward:

ViryaNet Ltd. has accumulated losses for income tax purposes in an amount of approximately $36,857 as of December 31, 2013, which may be carried forward and offset against taxable income and capital gain in the future for an indefinite period.

As of December 31, 2013, the Company’s U.S. subsidiary had a U.S. federal net operating loss carryforward for income tax purposes in an amount of approximately $61,818, which can be carried forward and offset against taxable income for 20 years, expiring between 2018 and 2032.

ViryaNet Europe and ViryaNet Australia were disposed of in 2011 and there are therefore no accumulated losses carried forward related to these subsidiaries (see Note 3).

Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

Deferred income taxes:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Under ASC 740 (“Income Taxes”), deferred tax assets, net are to be recognized for the anticipated tax benefits associated with net operating loss carry-forwards and deductible temporary differences, unless it is more-likely-than-not that some or all of the deferred tax assets will not be realized. The adjustment is made by a valuation allowance. Significant components of the Company’s deferred tax assets (and the Company’s valuation allowance with respect thereto) as of December 31, 2013 and 2012 are as follows:

	December 31,
	2013			2012
Deferred tax assets:
U.S. net operating loss carryforward	$	23,058		$	23,067
Israeli net operating loss carryforward		9,214			8,692
Other reserve and allowances		498			479
Total deferred tax assets		32,770			32,238
Valuation allowance		(32,770	)		(32,238	)
Net deferred tax assets	$	—		$	—

F-31

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 13:- TAXES ON INCOME (CONT.)

As of December 31, 2013, the Company and its subsidiaries have provided a full valuation allowance in respect of deferred tax assets resulting from tax loss carryforward and other temporary differences, due to the history of the Company’s operating losses since its founding through 2008 and in 2011, which raises uncertainty concerning the Company’s ability to realize these deferred tax assets in the future. Management believes that it is more likely than not that the deferred tax assets relating to the loss carryforward will not be realized in the foreseeable future and has therefore established a valuation allowance for the full amount of the tax benefits.

Deferred tax asset and valuation allowance in the U.S. did not change significantly from 2012 to 2013. In addition, deferred tax assets and corresponding valuation allowance in Israel decreased by $542 in 2013, due principally to changes in exchange rates between the Israeli Shekel and the US Dollar.

Uncertain tax positions:

As of December 31, 2013 and 2012, the Company maintained one uncertain tax position accrual, in an amount of $11 and $30, respectively.

The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. The final tax outcome of its tax audits could be different from that which is reflected in the Company’s income tax provisions and accruals. Such differences could have a material effect on the Company’s income tax provision and net income in the period in which such determination is made.

Net income (loss) for the years ended December 31, 2013, 2012 and 2011 is calculated after considering the impact of taxes as follows:

	Year ended December 31,
	2013		2012		2011
Income (loss) from continuing operations before taxes
Domestic	$	373	$	195	$	(424	)
Foreign		1,142		743		228
Total	$	1,515	$	938	$	(196	)
Taxes on income
Domestic	$	—	$	—	$	—
Foreign		32		27		9
Total	$	32	$	27	$	9
Income (loss) from continuing operations after taxes
Domestic	$	373	$	195	$	(424	)
Foreign		1,110		716		219
Total	$	1,483	$	911	$	205
Income (loss) from discontinued operations
Domestic	$	—	$	—	$	—
Foreign		—		—		(14	)
Total	$	—	$	—	$	—
Net income (loss)
Domestic	$	373	$	195	$	(424	)
Foreign		1,110		716		205
Total	$	1,483	$	911	$	(219	)

F-32

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 13:- TAXES ON INCOME (CONT.)

Reconciliation of theoretical tax expense (benefit) attributable to continuing operations to actual tax expense (benefit):

In 2013, 2012 and 2011, the main reconciling items of the statutory tax rate applicable to the Company (25% in 2012 and 2013, 24% in 2011) and the effective tax rate for the Company (2.1% in 2013, 2.9% in 2012 and (4.6%) in 2011) are tax loss carryforwards and other deferred tax assets, for which a full valuation allowance was provided.

NOTE 14:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION

a. Summary information about geographical areas:

The Company adopted ASC 280 (Segment Reporting). The Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. The Company has only one operating segment. The Company’s total revenues are attributable to geographic areas based on the location of the Company’s end customers.

The following table presents total revenues for the years ended December 31, 2013, 2012 and 2011 and long-lived assets as of December 31, 2013, 2012 and 2011 according to geographic region:

	2013				2012				2011
	Total revenues		Long- lived assets		Total revenues		Long- lived assets		Total revenues		Long- lived assets
North America	$	9,656	$	32	$	9,023	$	37	$	8,694	$	34
Europe		972		16		969		33		714		59
Asia Pacific		619		—		291		—		263		—
South America		367		—		430		—		—		—
	$	11,614	$	48	$	10,713	$	70	$	9,671	$	93

b. Revenues attributable to major customers:

There was one customer accounted for approximately 12% of the Company’s total revenues in 2013 and one other customer accounted for approximately 11% of the Company’s total revenues in 2012. There were no customers who accounted for 10% or more of the Company’s revenues in 2011.

NOTE 15:- FINANCIAL EXPENSES, NET

The Company’s financial expenses, net during the years ended December 31, 2013, 2012 and 2011 were derived and comprised as presented below:

	Year ended December 31,
	2013		2012		2011
Income:
Foreign currency translation adjustments		—		—		109
Other income		—		—		15
Total income		—		—		124
Expenses:
Interest and bank charges		144		154		253
Foreign currency translation adjustments		145		42		—
Total expenses		289		196		253
Financial expenses, net	$	289	$	196	$	129

F-33

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 16:- RELATED PARTY TRANSACTIONS

a) In June 1999, the Company’s Board of Directors approved the issuance of 3,478 Series C-2 Preferred shares to the Company’s Chairman for a purchase price of $100, which the Chairman paid based on a loan provided to him by the Company. The loan was approved by the Company’s shareholders in June 2000 and bears annual interest at the rate of 6.5%. Repayment of the loan is due when the Chairman sells or otherwise disposes of the shares that were purchased with the proceeds of the loan. In addition, the Company, at its sole discretion, may call for immediate repayment of the loan and the interest thereon in the event that (i) the Chairman becomes bankrupt or files a motion for bankruptcy, or (ii) the Chairman ceases to remain in the employment of the Company for any reason.

b) On June 30, 2011, the Company entered into a share purchase agreement with Jerusalem Technology Investments Ltd (the “Investor”), a company with which two of the Company’s directors—Samuel HaCohen and Vladimir Morgenstern— and one of the Company’s major shareholders (Jerusalem High-tech Founders, Ltd.) are affiliated. Pursuant to the agreement, the Investor committed to invest in the Company an amount of $250 within 31 days from the date of the agreement, as consideration for the issuance to the Investor of 250,000 of the Company’s Ordinary Shares at a price of $1.00 per Ordinary Share. 50,000 of those Ordinary Shares were issued on June 30, 2011, upon a payment of $50 by the Investor. In February 2012, the Investor invested an additional $75 portion of its total commitment under the agreement. This equity financing constituted an extraordinary transaction in which two of the Company’s directors possessed a personal interest and was therefore approved by the Company’s audit committee and Board of Directors in accordance with the requirements of the Companies Law.

On December 17, 2012 the Company and the Investor reached an agreement according to which the parties terminated the share purchase agreement by mutual consent such that no further investment will be made under the share purchase agreement by the Investor, and both the Company and the Investor released each other from any claims related to the share purchase agreement. In lieu of the additional amount of $125 that was not invested by the Investor, Samuel HaCohen, the Company’s chairman and an affiliate of the Investor, signed a personal guarantee in favor of two banks, Bank Otsar Ha-Hayal and Bank Leumi, in order to enable the Company to secure loans from those banks (see Note 8). No further consideration was provided to the Investor and/or Samuel HaCohen in connection with the personal guarantee. This agreement constituted an extraordinary transaction with a deemed affiliate of the Company who possessed a personal interest and was therefore approved by the Company’s audit committee and Board of Directors in accordance with the requirements of the Israeli Companies Law.

c) On December 31, 2011, the Company completed the sale of 100% of the common stock of ViryaNet Australia, to Hosking Family Trust, owned by the former general manager of ViryaNet Australia, Mark Hosking (“Buyer”), for consideration of $340. The consideration is to be paid as follows: $100 was due on January 2, 2012 and the balance of $240 is to be paid over a period of four years in equal quarterly installments starting March 31, 2012, and bears interest at a fixed annual rate of 3.5%, paid quarterly. The repayment of the balance is secured through a personal guarantee provided by the Buyer (see also Note 3). This transaction constituted an extraordinary transaction with the Buyer, who may have been deemed an affiliate of the Company at the time and who possessed a personal interest, and was therefore approved by the Company’s audit committee and Board of Directors in accordance with the requirements of the Companies Law.

NOTE 17:- SUBSEQUENT EVENTS

a) On March 17, 2014 the convertible note of $600 principal amount which is convertible into 363,636 Ordinary Shares at a conversion price of $1.65 per Ordinary Share at the holder’s discretion (see Note 12b), was converted into 363,636 Ordinary Shares, in accordance with the terms of the convertible note agreement.

F-34

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 17:- SUBSEQUENT EVENTS (CONT.)

b) On June 10, 2014, the Company entered into an Agreement and Plan of Merger, or the merger agreement, with Verisae, Inc., a Minnesota corporation, and its wholly-owned subsidiary, under which the Company agreed to be acquired by Verisae, Inc., or Verisae.

The merger agreement calls for Verisae to acquire all of the issued and outstanding shares of the Company for aggregate cash consideration of $18,825, to the Company’s shareholders, subject to a net cash adjustment to be made as of the closing of the transaction. The Company currently anticipates that the consideration per Ordinary share payable at closing shall be in the range of $3.15-$3.40 per share. Closing is expected within approximately 75 days of the signing date of the merger agreement, subject to regulatory approvals in Israel and approval by the Company’s shareholders.

As a result of the acquisition, the Company will become a strategic business unit of Verisae, a global provider of the Connected Facility – an integrated software platform that combines maintenance, machine to machine monitoring, energy, and sustainability software solutions into one.

For a description of this transaction see the proxy statement for the extraordinary general meeting of shareholders at which the transaction will be subject to approval by the Company’s shareholders, which is attached to the Company’s Report of Foreign Private Issuer on Form 6-K that was furnished to the SEC on July 1 2014 and which is incorporated by reference herein.

F-35